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Apr 4, 2016 | 09:31 GMT

The GCC: Shared Goals, Different Approaches

The combination of military and economic leadership within the Gulf Cooperation Council will keep it unified through a trying economic and political time.
(KARIM JAAFAR/AFP/Getty Images)
Forecast Highlights

  • Security threats will hold together the Gulf Cooperation Council (GCC), which is heavily influenced by its largest member, Saudi Arabia.
  • Every GCC member state is working to reform and diversify its economy, but states will take different approaches toward this goal.
  • The GCC as a whole will seek comprehensive economic cooperation to attract foreign investment, following the model of the United Arab Emirates.

As in any boom and bust cycle, low oil prices are affecting the behavior of oil-dependent states globally, prompting them to diversify and to privatize their oil assets to limit their losses. The GCC states — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman — are among the most oil- and natural gas-dependent economies in the world, and though they have long discussed and made progress on economic reform, there is now a renewed urgency behind their efforts, especially given the recognition that oil prices could remain low for the next five years or longer. 

Following the oil crises of the 1970s and the British withdrawal from the Middle East in 1971, the GCC was founded in 1981 to facilitate economic and security cooperation between its six member states. Even countries now considered rivals were part of the preliminary discussions on forming the group. In 1976, foreign ministers from the current GCC states and from Iran and Iraq met in Muscat, Oman, to consider a joint regional security and defense policy. Even back then, there was a mistrust of Iran's economic and military influence on the region, though the wariness of its brand of Islamism did not begin until after the Islamic Revolution in 1979. Continued competition with Iran for political and economic hegemony has prompted the GCC to align itself with member state Saudi Arabia, the largest counter force to Iranian interests in the region. In fact, Saudi Arabia, whose population is larger than those of the rest of the GCC member states combined, leads the GCC's security coordination.

Committed to Security

Because of their shared desire to counter security threats, GCC members will continue to have coordinated responses to regional security issues, despite plenty of ideological and political differences between them. Still, competing visions for the future of the Middle East, for example between Qatar and Saudi Arabia, do cause conflict. Qatar's support for the Muslim Brotherhood and other Islamist groups as well as for Islamist-leaning rebel groups in Syria sometimes puts it at odds with its GCC peers and has complicated relations with important GCC allies, including Jordan and Egypt. The most recent example of such conflict took place in March 2014, when Saudi Arabia, the United Arab Emirates and Bahrain withdrew their ambassadors from Qatar, accusing it of jeopardizing GCC security, after Qatar refused to commit to a security agreement signed by every other GCC member.

Nonetheless, Qatar is still viewed by stronger GCC members such as Saudi Arabia and the United Arab Emirates as a containable maverick, and it has supported Saudi Arabia's recent anti-terrorism efforts. The threats against the Gulf region as a whole will keep the smaller GCC states, including Qatar, dependent on Saudi Arabia and its military might, which has recently expanded with its intervention in Yemen and its global anti-terrorism coalition. Joint military operations by the GCC's 30,000-strong Peninsula Shield Force, based in and funded primarily by Saudi Arabia, displayed how effectively it can protect its members when it intervened in Bahrain during the Arab Spring. Today, GCC members worry about the threats posed by their unstable neighbors, including Syria, Iraq and Yemen. In their view, these countries are breeding grounds for extremist groups and places where Iran can bolster its influence, which is why the GCC has financially, diplomatically and militarily supported proxies throughout the region to shape and manage governments.

Aside from military cooperation, the GCC states face common challenges when it comes to balancing their dependency on energy revenues, managing political dissent and competing with Iran, but they each deal with these challenges in slightly different ways. The economic challenges facing each state necessitate different domestic solutions and will keep each mostly focused on managing its own economic and foreign affairs. Oman and Qatar's more moderate approach to Iran, for example, has benefited them economically through their trade relationships with Iran. And if Saudi Arabia leads the GCC when it comes to military matters, the financially strong United Arab Emirates leads it economically. The United Arab Emirates is working to streamline economic cooperation between GCC states to present the group to the international investment community as a desirable destination for foreign investment. This combination of military and economic leadership in the GCC will keep it unified through a trying economic and political time.

To Establish Similar Systems

The United Arab Emirates will lead by setting examples for common policies and coordination, including the implementation of a value-added tax and banking sector reform, which will make the GCC as a whole a better site for investment over the next few years. A guiding point of the GCC's charter, after all, is to establish similar systems among member states in a variety of fields, including economic and financial sectors. The choice of a regionwide 5 percent value-added tax instrument is key for tax-sensitive regions such as the GCC because it can be introduced and adjusted over time to be more comprehensive, and it is also based on consumption patterns rather than on personal income, which if taxed would cause significant discontent. The value-added tax is set to be standardized to reduce cross-border smuggling between GCC states. In addition, the rest of the GCC — mainly Saudi Arabia and Bahrain, which have large banking sectors — are implementing regulations, following the example of the United Arab Emirates' central bank in complying with global Basel III banking regulations to try to attract more international investment.

The United Arab Emirates, Kuwait and Qatar are in a better financial position than their GCC peers because they can implement economic reforms more slowly thanks to their larger reserves, healthy sovereign wealth funds with profitable investments globally, and smaller populations. Saudi Arabia, Bahrain and Oman, on the other hand, do not have the luxury of time, and they will feel the economic pressure more intensely. These economic differences translate into varied responses to the prolonged oil price slump. Efforts to diversify revenue streams in each state tend to result in solutions that hurt as much as they help. Reducing the wage burden on the government in each state is a priority, but it is in direct conflict with localization schemes that set goals for employing nationals in various sectors. Increasing employment in the private sector is one of the main issues that have yet to be comprehensively solved because it is tied to sensitive issues of motivation, cultural values and vision. The private sector still struggles to present well-paying and appealing job opportunities for nationals. GCC governments today are trying to more slowly and carefully adjust subsidies and taxation, but they continue to come up against opposition from the ever more nationals in each generation reliant on the states' primary means of redistributing oil wealth: public sector employment.

The issue of subsidy reform is being approached in different ways, too. As with localization schemes, these efforts are challenging, and each solution to a problem tends to cause more problems. Bahrain has undergone the most comprehensive changes so far; meat, vegetable and tobacco subsidies have all been adjusted or repealed. Kuwait attempted to repeal food subsidies in late 2015 but faced public opposition to the plan. Oman, for its part, has floated the idea of personal consumption taxes but has yet to enact anything as sweeping as Bahrain's plan. Fuel subsidy and energy price reform is a blanket effort across the GCC but has been undertaken in different ways throughout the region.

Taxes and fees on foreign corporations, especially in the oil sector, are already widespread, though not for locally owned companies. Taxing locally owned companies will be an entirely new proposition in the coming years and will be a radical departure from the tax-haven structure the GCC states are known for. Efforts to introduce taxation have continually encountered opposition in GCC states, even as far back as the 1920s, during a period of state consolidation in Saudi Arabia. Today, Oman and Kuwait are the first to mull over widespread corporate taxes — 15 percent in Oman and 10 percent in Kuwait — and Saudi Arabia is set to implement a land tax. Such taxes are in line with a series of International Monetary Fund (IMF) consultations in 2015 with GCC ministers and central bank governors, in which the IMF suggested a joint value-added tax along with individualized property taxes, corporate income taxes and efforts to reduce government expenditures for each state.

Saudi Arabia is particularly constricted in its privatization and diversification push because of its higher population. Saudis have grown accustomed to public sector employment or sufficiently high private sector salaries as well as to government handouts, which will not be as feasible given lower oil prices and the pragmatic Saudi Deputy Crown Prince Mohammed bin Salman. In previous periods of low oil prices, such as in the mid-1980s, GCC governments sought to quickly cut back government spending but faced significant pushback from the business community, particularly in Saudi Arabia. Kuwait, too, tried to act on IMF advice in the mid-1980s regarding cutting government expenditures by repealing subsidies and implementing heavier taxes, but it found that such suggestions were unable to successfully pass through parliament. The taxes will encounter various types of opposition based on the political issues in each state. It is unlikely, for instance, that the 10 percent corporate income tax will easily pass Kuwait's particularly vocal and representative parliament.

A Slowly Changing Union

Politically, the GCC states cannot overhaul their complicated systems quickly, since this is an intensely individual cultural decision in each GCC state and relates to the changing of the expected social contract. This social contract will change most drastically in vulnerable Saudi Arabia, putting the current Saudi leadership at the most risk among GCC royalty. The GCC, as opposed to other political unions such as the European Union, is more of a security union than an economic one, even though both security and politics factored into its founding.

With Saudi Arabia's central bank announcing recently that the kingdom's money supply fell in February for the first time in more than a decade, it is clear Saudi Arabia needs the security it finds in the GCC union it leads. The United Arab Emirates, for its part, will see its role in charting an economic example for other member states garner even more attention in the years ahead.

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