Oil-producers value inward investment for domestic development, especially when the oil price is low, writes Rory Miller
GCC meeting in Riyadh points the way forward
Last week in Riyadh, senior Gulf officials met to launch the GCC’s Commission of Economic and Developmental Affairs.
Key players such as Sheikh Mansour bin Zayed, Deputy Prime Minister and Minister of Presidential Affairs, joined their host, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman, in using the occasion to call for deeper regional economic integration and coordination.
This emphasis on working together is an important reminder that though the GCC was born in a period of conflict and instability in the early 1980s, the rationale has always been economic.
As the GCC’s first secretary-general Abdullah Bishara explained, the plan was to "convert six chambers in a big house into a big house without barriers".
This did not mean that GCC member states had signed up to deep integration in the short term. Instead, the agreed plan was for them to capitalise on the oil boom of the previous decade to build up the organisation as a regional economic bloc.
Since then, the GCC attempts at economic cooperation and integration have been steady.
Last year the GCC Customs Union was completed ensuring that a common external tariff is collected at all points of entry across the GCC. This has led to the harmonisation of standards, and extended free movement and opportunities for citizens to invest freely in real estate and companies across the Gulf.
But much more still needs to be done on a regional level to improve the mobility of capital, labour, goods and services across the GCC.
Existing regulations require companies to follow multiple strategies in accordance with the six GCC markets, leading to the inability of foreign investors to treat the GCC as a single large market.
The market for financial services is also fragmented. There is little regulatory convergence and each member state has developed its own regulatory system for banks and other financial institutions.
Past efforts at economic integration have also been fuelled by easy money and government subsidies.
But as oil revenues decline and cash reserves shrink the easy money and government subsidies of the past can no longer be counted on.
That is why the sentiment and symbolism behind the establishment of the Commission of Economic and Developmental Affairs is so important.
It is an acknowledgement at a crucial time that despite variations in wealth, population size and resources, all the Gulf countries share to a large degree the same socio-economic challenges.
They have to earn more and spend less while at the same time move beyond dependence on oil and gas revenues to balance their budgets.
The meeting was also an acknowledgement that the GCC states share a common understanding of what needs to be done to overcome these challenges.
One important requirement is increasing the amount of foreign direct investment flowing into the region.
Since the 1970s the Gulf states have all been net exporters of capital, as huge amounts of money have flowed out of the region.
Much of this has flowed into overseas investments that have increasingly come to be viewed as a key sector of non-oil growth.
Overall, the Gulf still only attracts relatively small amounts of foreign direct investment every year.
In fact, foreign investment flows have halved since 2010, as the tightening of local funds has led to the withdrawal of foreign companies, notably law firms, financial services companies and business consultancies that relied on high levels of Gulf spending to fund their work.
Even rich oil producers value inward investment for domestic development, especially when the oil price is low. It is a more attractive and less volatile source of capital than bank loans and it brings technology, market access and organisational skills to the host country.
It is still unclear whether the Gulf states can work together to overcome the scepticism of their citizens and provide the collective political will needed to deliver deeper economic integration in the interests of all.
But the meeting last week in Riyadh was an important step in the right direction.
Rory Miller is a professor of government at Georgetown University in Qatar. His new book, Desert Kingdoms to Global Powers: The Rise of the Arab Gulf, is out today