As geopolitical turbulence swirls from Yemen to Syria and oil prices remain volatile and low, it is time for the Gulf Cooperation Council (GCC) to come together for a second founding moment. However, this time, it’s more pressing than ever as the GCC needs to think hard, in unison, of its post-oil future.
While regional organisations from the European Union to NAFTA are showing signs of strain and even cracking, there is no question that they boost shared economic growth by lowering the frictions to internal flows of trade, investment and migration. And by aggregating countries into a common market, they greatly strengthen a region’s negotiating position on the global stage.
Given the GCC’s relative youth and its members’ stage of economic and political development, the best role model to study for inspiration is Southeast Asia’s ASEAN, which celebrates its 50th anniversary this year. Despite post-colonial poverty and Cold War tensions, the 10 member-states of ASEAN have made enormous strides, especially in the past decade.
The sub-region’s 650 million people represent about half the population of India yet boast a larger GDP at over $2.5 trillion. And with less than half the population of China and only one-sixth the GDP, ASEAN now attracts more FDI year-on-year than China does.
With low labour costs and growing connectivity, ASEAN is becoming the world’s new factory floor.
Simply put, ASEAN has turned economies that measure in the billions into a collective powerhouse that measures in the trillions. This is a critical time for GCC countries to redouble efforts at integration as a means to shore-up domestic stability, pool regional power and expand future horizons.
Instability in one GCC country can impact the rest of the GCC in so many ways. With oil prices structurally low, the Gulf is destined to lose strategic relevance and purchasing power over time, absent of structural reforms.
The knock-on effect of low oil has also reduced government investments, which has hurt non-oil sectors and reduced business confidence. The 10 per cent government surpluses of 2013 have now become deficits averaging 7 per cent across the GCC, requiring governments to draw down reserves, issue new debt, undertake austerity measures (such as cutting subsidies for fuel, water and electricity).
While GCC growth barely reaching 2 per cent, its largest export destination of Asia averages between 4-5 per cent led by India and ASEAN. Over the past half-century, Asian countries have successively industrialised while also advancing towards a sensible division of labour between countries specialising in manufacturing, agriculture, finance and other areas.
Attracting foreign investing, adopting Western technology and accumulating capital drove the so-called “East Asian miracle”. The region still finds itself in a “sweet spot” for another two decades of steady growth in light of its young population, high savings rate, current account surpluses, political stability, and female empowerment — all virtues holding lessons for the Gulf.
There has never been a more opportune moment for the GCC to leverage its strong ties with ASEAN to trade energy for technology and other investments that advance Gulf economic diversification. Like ASEAN, the GCC has not yet achieved monetary union, but trade, investment, customs, infrastructure, migration, regulation and knowledge cooperation can all deepen further in the years ahead.
For example, the GCC could advance its common market through an ASEAN-style “single window” for investment across the region, a step which has significantly boosted FDI into ASEAN.
Division of labour and specialisation within the GCC could be one way. Much of the oil-boom was about replication and trying to outcompete one another. Long-standing plans for more integrated GCC infrastructure such as high-speed passenger and freight rail should also be accelerated, creating jobs and easing movement for the region’s burgeoning urban populations.
In ASEAN, plans are moving forward for integrated rail corridors stretching from Kunming in southern China all the way to Singapore.
Plans for GCC-wide VAT by 2018 are another example of a coordinated policy instrument that could benefit regional-balance sheets simultaneously while updating business and tax regulations.
Another very significant arena of learning is capital market formation. World-class financial regulation has made cities like Singapore global hubs for the asset management industry, generating huge liquidity in both sovereign and corporate debt markets.
Combined with transparent foreign ownership laws, this makes privatisation a very attractive investment for the trillions of dollars of pensions, private wealth and other stakeholders seeking higher yield.
Especially because the pending partial float of Saudi Aramco is only the leading example of how the region’s state-owned assets must be opened up to the private sector. GCC countries should study closely how Singapore’s government linked companies (GLCs) model shows the way for diversifying the investor base across sectors while improving corporate governance.
From skilled-migration to female empowerment to R&D investment, there is much more for the GCC to learn from its thriving ASEAN partner. Productivity and human capital enhancement are essential for the GCC.
Singapore’s increase in foreign worker levies to dissuade businesses from being over-reliant on foreign workers is an important lesson for GCC countries to take stock of. The ASEAN invested heavily on education for long, something the GCC needs to heed.
Whether the GCC’s plans go by the name of Vision 2030 or something else, the wisest course of action is to follow the path of the region that has already turned vision into reality.
Dr. Parag Khanna is a Senior Fellow at the Centre on Asia and Globalization at the Lee Kuan Yew School of Public Policy at the National University of Singapore. Dr. John Sfakianakis is director of economic research at the Gulf Research Center in Riyadh.