Unifying The Currency Of The Gcc Countries Economics Essay

This paper discusses the replacing as the long term of the Gulf Cooperation Council ( GCC ) currencies with one common currency. The states that form rank of the GCC are, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arabs Emirates ( Fasano and Iqbal, 2003 ) . The formation of pecuniary brotherhood involves the creative activity of new transnational currency, such as the euro, and its permutation of members ‘ ain currency ( Kenen & A ; Meade, 2008 ) . Through an understanding that was concluded in 1985, the GCC was established. The motive for the formation of the GCC was a desire to hold common market, have similar end as a part and incorporate political system since they all profess an Muslim faith. The fusion of the currencies is expected to come with plentifulness of advantages instead than disadvantages. Some of the advantages include, improved economic growing, the economic systems around this countries are able to intermix good and these states being rich in oil, there is demand to better those non-oil bring forthing facet of the economic system ( Emerson, 1992 ) . However, it is of import to observe that, currency fusion is non the lone factor that may be put in topographic point to gain greater regional economic growing or roar.

To achieve to the full economic growing, all other facets should be put in topographic point to guarantee that it is a success. The other factors that may necessitate to be addressed include, comparative political stableness, common exchange rate for the regional currencies and developement of great policies for concern to boom. It is of import to hold common exchange rate so as to acquire value for all currencies. It is hence of great importance to understand both sides of the coin or pro and cons before hotfooting into it. This paper will besides be comparing the common GCC currencies fusion procedure to the 1 that was earlier undertaken by the European brotherhood. Another comparing will be made with Kuwait in respect to currency fusion. This should cover long-run advantages and disadvantages.

LITERATURE REVIEW

The GCC member states have their ain single currencies. In this paper, we are turn toing the issue of presenting one common currency for all the member states. This will come with advantages and disadvantages. It is of import to critically analyze the advantages and the disadvantages so as to do an informed determination if it is deserving it or non. Furthermore, GCC states have bit by bit taken a figure of stairss towards implementing market-based pecuniary policy, though direct instruments ( such as involvement rates and recognition ceilings ) continue to play a function in a few of these states ( Fasano & A ; Iqbal, 2003 )

Professionals and Cons of common currency

The common currency acceptance by the GCC will come with it advantages and disadvantages. The major advantage that will be realised is the cut of costs that are involved in exchange from one currency to the other within the part. As a consequence, the GCC states will gain an improved ecnomic growing. This would be a major advantage for the non-oil economic systems. This would therefore mean that each member state benefit from common rate ( Emerson, 1992 ) . The chief disadvantage nevertheless is that any job that will be realised in one state may be relicated in another. This is because states will no longer be utilizing single exchange rate policies. There seems to be a balance between the advantages and disadvantages.

As reference in the earlier, the chief benefit that the GCC states will gain from holding one currency is the film editing of the dealing costs when change overing one currency to the other within the part ( Fasano and Iqbal, 2003 ) . This is because the single currencies do non hold similar exchange rate. When purchasing and selling foreign currency, persons will lose money in the procedure. Another manner that money is through foreign exchange committees. For states that operate from more than one state, it will extinguish the accounting costs. Time spent at the lodgers doing payments will besides be greatly reduced. Any uncertainness about biliteral exchange rates will be eliminated to the full. At the minute, the rates that are used are derived from the states relation to the dollar. The dollar rates may alter more than one time and this may do a bigger job. This would usually do uncertainness.

It is a point of worth to observe that riddance of the regional costs and uncertainnesss will be of import for economic growing within the GCC ( Fasano and Iqbal, 2003 ) . In kernel, this integrating costs are similar revenue enhancements to the persons and concerns. Removal of this revenue enhancements will guarantee that concern procedures are made low-cost and non a load to the concerns runing in the part. This remotion will besides better the developement of its non-oil economic system. From the oncoming, this is the chief end of GCC. Anothe advantage that it may help in transfusing subject to the pecuniary policies particularly to states that do non hold a stable exchange rate.

Loss of independency of pecuniary and exchange rate may be the biggest blow that the GCC member states may gain ( Fasano and Iqbal, 2003 ) . Exchanged rates are measured against each other, involvement rates based on foreign involvement rates any excess money in circulation will take to shortage in balance of payment. Exchange rates play an of import function in the economic system as a stabilizer. Disregard of these instrument will usually take to occupation losingss. This cost is nevertheless contained to an extend that effects to the states in the part tend to be balanced as to anticipate common response. This would usually happen in scenarios where monetary values and rewards are inactive or in state of affairss where capital and labor are similar accross the GCC states. Policy liberty would be a job in economic systems that rely on grosss. An illustration would be states that have hapless revenue enhancement system.

Factors to see while organizing common currency

In finding the state ‘s preparedness to fall in the common currency, it is of import to see a figure of factors. The factor are related with stable exchange rates and currency fusion that is desirable. As to the relation to bing national currencies, debut of individual currency would ask in each state a alteration in unit of history ( Emerson, 1992 ) These factors are:

Openness: when a state is to the full dependent on international trade, such a state is more likely to be more straight to be affected by any fluctuation in the exchange rates. This is usually because its goods are tradable. In such instances, any fluctuation in exchange rate, will usually give to a alteration in cost of the goods. This would therefore connote that exchange rate is non an effectual tool of heightening fight. It is hence easier for a smaller economic system to come in into currency brotherhood more easy that larger economic system.

Factor mobility: in instance of instability, if more than one state are extremely integrated in the position that labor and capital can easy travel across within the member state, exchange rate may non be an efficient disciplinary tool to be used to turn to the state of affairs as it is. Factor mobility in this instance will play a critical function in this instance as the exchange rate would hold played in those other economic systems that depend on exchange rate. Factor mobility would so play a important function in extenuating the job. It is hence of import that factors that experience higher mobility factor get into currency brotherhood.

Degree of trade good variegation: an economic system that is diversified has better protection against any market dazes therefore non really dependent on exchange rate as factor to cut down the impact of the daze. Therefore, it is clear that states that have diversified merchandises are better topographic point to acquire into currency brotherhoods.

Simillarity of production construction: when states have simmilar production construction they are more likely to hold simmilarv dazes. The exchange rate in this instance may non be used as a major factor in an effort to corect the state of affairs. This would do such states better placed to organize currency brotherhoods. When for illustration the state is bring forthing wheat, and others are bring forthing simillar harvests, it easier for them to associate, compared to those that do non hold simillar production constructions.

Monetary value and pay flexibleness: monetary value and pay flexibleness do non necessitate exchange rate to be altered in a instance of daze. Those states that have flexible monetary values and rewards will normally prefer to hold common currency to unclutter the issues outstanding. If in one state the rewards are high and in another the rewards are really low, it becomes really hard to synchronize them. Person from one state school be in a place signifier to travel from her state to another.

Simillarity of rising prices rates: similarity of fluctuation rates is an indicant of economic constructions and policies. If states want to organize their economic activities, it would be naccesary for them to acquire in to an understanding so as to achieve common currency. This would do it easier for coordination of their economic activities.

Degree of policy integrating: similarity of policies with states may indicate the demand for an economic integrating. States that do n’t hold any similarity will be given to be less interested in organizing economic integrating in relation to those that have closer policies. It would be easier for them to fall in custodies and work together.

Political factors: political dramas an of import function in guaranting sucess in the declaration of states to hold similar currency. Economic factors play a function in currency brotherhood, but experience shows that political factors play a major function in attainment of the same. Without political will, nil of kernel will be attained.

Beginning: Emerson ( 1992 )

EUROPEAN UNION

In an effort to look into GCC desire to hold a common currency, comparing with other success narratives is critical. In this respect, it is deserving looking at European Union as a theoretical account to larn from. Baldwin, Bertola and Seabright ( 2003 ) states that in effort to unify the European states, a batch has been achieved. This has to the formation of a individual currency across Europe. The creative activity of the Eurpean Union has come with so many advantages to the citizens of these states. However at times, the advantages are non understood by many. The creative activity of common currency is welcomed by many though some people are still non happy about it. Critics believe that the individual currency is responsible for increasing rising prices and that it has caused the economic system to weaken ( Emerson, 1992 ) . However, closer survey of the markets indicate that rising prices has non occurred in the part and every bit much as there are weak economic systems, strong economic systems exist within the same country. The chief advantages enjoyed by the citizens is the easy with which citizens easy move within the euro part. The other advantage accrued is the low rising prices rates. Citizens take up this low rates inform of mortgages. This means that if one had a debt, it is cheaper to serve it ( Emerson, 1992 ) . E-commerce has been another country that citizens have been able to bask. This is because, they are able to shop across the European zone without fearing that exchange rates may alter hence impacting them negatively. The lone job that the citizens may confront is the cost of reassigning money across the member provinces.

One other success factor of the European Monetary Union ( EMU ) is that it prevents war ( Baldwin et al. , 2003 ) . From the start, EMU has been a political undertaking. With its initiation, there has been comparative peace with the part. It is common cognition that when states trade with one another, it is usually hard for them to assail each other, this would so allow peace to predominate. If EMU brings trade, it hence means, it will convey more understanding in the part. One of the chief advantage of EMU is increased transparence and efficiency of fiscal markets: the monetary values and returns of fiscal instruments dominated in the same currency can can reflect their hereafter final payments, instead than market participants ‘ rating of exchange rate alterations ( Baldwin et al.,2003 )

The dealing cost will be entirely eliminated. An illustration is where a UK house wants to merchandise with Europen Members. This implies that they would hold to purchase foreign currency before they can purchase goods. But for houses that operate the EU it is really inexpensive for them because the would non hold to incur any cost when alteration currencies.

Monetary value derived functions are usually highlighted by individual currency ( Emerson, 1992 ) . Proper betterments and concentrate on competition, will at the terminal of the twenty-four hours guarantee that the economic system is more adept and monetary values of trade goods are bit by bit brought down. This will be aimed at stoping market favoritism. The EMU will take to guarantee that there is monetary value stableness, which can be achieved by non politicking the European cardinal Bank ( Baldwin et al. , 2003 ) .

In outgrowth of free trade, the European Union is set to profit to the full. In state of affairss where by the EU wants to organize concern partnerships with other trading blocks, it would be really nice for and of advantage to european brotherhood states, because they have higher bargaining power.

UAE ‘s Resistance

The UAE does non look to to the full back up the whole thought of currency fusion. This is believed to be because of GCC ‘s to travel the cardinal bank in Saudi Arabia and non UAE ( Fasano and Iqbal, 2003 ) . This is because in 2004, UAE was the first state that undertook to inquire to be given permission to host the cardinal bank. At the most, GCC does non hold any constitutions in UAE.

Close examination will besides uncover that the UAE did non hold faith in the whole brotherhood. They believed that by following common currency, their economic systems can easy be got into by other parties. This is because it can be jointly assesed. With such misgiving, it usually really hard to organize a formidable brotherhood. It would necessitate the intercession of GCC, to do things understood, otherwise, nil would be achieved. Failure to clear up things would be like trailing a wild goose. It would stay a piped dream.

Methodology

The research on the currency brotherhood among GCC provinces is like any other undertaking. This therefore means that a methodoly has to be developed to properly transport out the research for better consequences. Mothodologies for undertakings need to be relevant to the undertaking. Incorrect pick of methodological analysis would take to failure. Failure to set method in topographic point will usually ensue in hapless deliverables at the terminal of undertaking. All undertakings require the followers:

Planing

Organization

Execution

Assesment and following up.

Figure ( 1 ) : undertaking direction rhythm

Undertaking induction is the phase which aims are countries to be covered are identified by analyzing the current state of affairs. At this phase, the premises of the undertaking would be outline as both advantages and disadvantages every one involved in the undertaking should clearly understand their function in the procedure. Organisation vision is of import to be developed good in progress before any alterations that may happen. Without a clear vision, it would go really hard for the administration to achieve its ends because of the legion jobs associated with them. This may be because of deficiency of clear vision from the oncoming. With feasibleness of the undertaking asserted, it would so necessitate that the organisation leader plays a function in doing happen. Feasibility survey will be used to determine if the undertakings would hold any economic sense in them. Those undertakings that are non executable are better left out of the range. Prosecuting them would turn out to be expensive for the company.

Planing and organisation is the 2nd phase. At this point, action programs and activities to be carried out by each participants are clearly laid out. It is of importance to be after good in progress to debar any job. Failure to program good will finally do a crisis in the ulterior phases because at the terminal of the twenty-four hours, ends are non met. Peoples set abouting this may work together as squad, or as single, depending on what is necessary at the minute. More demands are identified, this will help in readying for the execution phase. Procudures and policies involved should be reviewed and endorsed before come oning to the following phase. It is of import that shareholders are actively involved at every phase. Ignoring all shareholders may do the undertaking to be denounced when it is eventually delivered.

The execution phase involves existent executing of activities that had been outlined in the old phases. Resources that were set aside are so directed at doing certain that the coveted ends are attained at all cost. The squads would usually work together to derive common ends. Implemetation is done harmonizing to predetermined agenda that has been set up by the organizers. Failure to implement the plan good would take to failure in many facets.

After the completion of the execution phase, it is of import to reexamine the result. This would be done to find if what has been developed is in line with what was desired before the start of the undertaking. They are intended to happen out if there are any fluctuations. It is of import to guarantee that all the aims are fulfilled. Whenever hazard is identified, something has to be done to debar the job.

After the undertaking is accepted by the commissioning authorization, it would be necessary to let go of all the resources involved. All those involved are thanked for their valuable experience. There are times when the original ends may non be captured, these agencies that the full procedure will necessitate to be done all together or rectify those countries that were non done right. After guaranting that all is done, it would be wise to halt the procedure.

Datas

The information below is used to demo the relationship between many variables in the GCC market. The interrelatedness among the variables is of import in guaranting that those factors are put in topographic point to gain the ends required. This factors include:

Openness: the GCC states are believed to be the most unfastened states in the full arab part. In kernel, openness is formulated by comparing the ration of trade over gross domestic merchandise ( GDP ) . In table 1 below, we attempt to give the openness of GCC states.

Figure 2: Benefits of Monetary Union in an Open Economy from Emerson, M. ( 1992, p.107 )

Factor mobility: the freedom to travel capital and single motion across the GCC states has been allowed in an understanding of the GCC states. The free motion comes together with the freedom to carry on economic activities within any of the states without any limitations available. However with all this in topographic point, there are still limitations on the activities that can be done by the subjects of the GCC. The ordinance in some establishments are non really similar. This posses a really large challenge.

Degree of trade good variegation: there is an effort by the GCC states to diversify their economic systems, but this is still non successful, because they are still really dependent on oil. The oil contributes about 80 % the GCC economy.Table 2 gives export indices ( World Bank, 2000 ) .

Table 2: Export Concentration Indices for GCC Countries

In the non-oil sector, activities are really slow and do non pull so much attending. Because of much dependence on oil, these economic systems have ever been victims of fluctuation of universe oil monetary values.

Policy integrating: the rising prices rates in the GCC states are non really correlative inspite of the fact that they have pecuniary, exchange rate and financial policies. The fluctuations in rising prices may be created by the assorted factors that are responsible for creative activity of rising prices. Factors that are responsible for rising prices are, supply and demands of trade goods ( goods and services ) . With common currency, the GCC states intend to defy market dazes utilizing their simillar policies.

Other factors: the GCC leaders have a strong committedness amongst them to guarantee that their end is achieved. This GCC states have so much in common. This may be politically, socially and in footings of societal constructions. It is an added advantage to the GCC member provinces because all are Muslim states. There are economic differences among the GCC states.

Beginning: Fasano and Iqbal, 2003

This nevertheless does non halt the leaders to hammer together and program to hold an economic integrating. This being Muslim provinces, there are some patterns that could impede the realization of this brotherhood. Peoples in these countries have really near household ties and would non desire to travel far off from their places.

CONCLUSSION

In decision, it non really clear when the common market would get down operation. There were people who said that it would be operational in 2010, but it is yet to be realised. There are nevertheless some states that have been doubting about the whole brotherhood. GCC needs to travel unit of ammunition member states seeking convince the citizens. They should besides do them gain its importance. There are factors that need to be addressed before this dream can be eventually realised. Factor mobility is an facet that can non be merely ignored. It would usually necessitate that people are able to travel from one state to another without acquiring any job while in theodolite. The policies are besides non to the full put in topographic point to guarantee that the ends are realised. All these may non be realised if political will is non at that place. It is hence of import tat the political swayers in this ares support this so as to achieve pecuniary brotherhood soonest.