Economic subjects | Economic policy » Verő Viktória - Economic strategies and their relation with foreign affair strategies in the member states of the gulf cooperation council

http://www.doksihu BUDAPESTI GAZDASÁGI FŐISKOLA KÜLKERESKEDELMI FŐISKOLAI KAR Gazdaságdiplomácia és Nemzetközi Menedzsment szak Nappali tagozat Szakdiplomácia szakirány ECONOMIC STRATEGIES AND THEIR RELATION WITH FOREIGN AFFAIR STRATEGIES IN THE MEMBER STATES OF THE GULF COOPERATION COUNCIL Készítette: Verő Viktória Budapest, 2009 http://www.doksihu 3 Table of content 1. Introduction 5 2. History of the member states of the Gulf Cooperation Council 7 2.1 Ancient times 7 2.2 The birth and spread of Islam 8 2.21 Understanding Islam 8 2.22 History and evolution of Islam 9 2.23 The Gulf in the medieval 10 2.3 The epoch of colonialism 11 2.4 In search for the “black gold” 12 2.41 Independence of the Gulf States 14 2.42 1970s - Oil price boom 15 2.5 Power plays and the question of regional stability 16 3. The Gulf Cooperation Council 20 3.1 Background of founding the Gulf Cooperation Council 20 3.2 The organization 20 3.3 Evaluation of GCC’s impact

on its member states 21 3.31 Economic cooperation 21 3.32 Foreign affairs relations and international trade 22 4. The current economic situation of the member states of the GCC 24 4.1 Overall economic situation and policies 24 4.11 Key drivers of the GCC economies 24 4.12 Economic policies applied in the GCC 27 4.2 The global economic crisis in the GCC 29 4.3 Analysis of the oil industry 32 4.4 The diversification strategies 35 4.5 A special issue: Arab Sovereign Wealth Funds 40 http://www.doksihu 4 4.6 The socio-economic situation of the GCC 42 5. Foreign policies and foreign relations of the GCC states 45 5.1 Foreign policies of the GCC 45 5.11 What is their interest? 46 5.12 What do they stand for? 47 5.13 How do they make decisions? 48 5.2 Foreign relations with other countries and regions 49 5.21 Iraq 50 5.22 Iran 51 5.23 The greater Arab World and the Islamic World 52 5.24 South and East Asia 53 5.25 The United States of America 55 5.26 The European Union

56 5.27 Role of the Gulf Cooperation Council in global politics 58 6. The way forward 60 6.1 The possible future 60 6.11 Global outlook 60 6.12 The Gulf Cooperation Council in 2020 62 6.121 Economy 62 6.122 Demography 65 6.123 Energy 66 6.124 Governance and politics 67 6.2 Conclusions and closure 70 Abbreviations . 74 Bibliography . 75 http://www.doksihu 5 1. Introduction The core question of this thesis is "How the economic strategies of the member states of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) affect their foreign relations and their stand in the global politics?" The purpose is to point out through research and evaluation of past and current situations, that on the platform of global politics there is a chance for countries to gain power due to one key commodity that they posses, which others do not, or only in notably less scales, and this creates an opportunity to grow up not only as a leading

economic force but also as a political power on a global scale. In this concrete case crude oil as the commodity; the member states of the Gulf Cooperation Council as the owners of the commodity, possessing 40% of the worlds proven oil reserves and providing almost quarter (22%) of the global oil production; and then there the countries that consume crude oil. What does it mean for the six member countries of the Gulf Cooperation Council to be in this position? How do they see their role? How does the rest of the world see this situation? And what happens, when the countries in concern decide to change their economic direction and strategies? How will their role change in the global politics, if they manage to create an economy based on cooperation (between the six countries) and diverse sources of income? Throughout the history of the region we can observe a strong relation between their economic focuses and how they were related to each other and to other countries or territories.

There have been evidences shown that when their economies grew intensely, majorly due to oil incomes, they were able to turn it into a political power for their own benefit, basically paralysing the global economy in order to reach a political goal. In the past 30 years they have been trying to find ways to diversify their economies, for the sake of one realistic fear: what would happen if they lose out on their wealth and power in case of losing their petroleum incomes in one way or another? The success of this idea is not clear yet, but it is interesting to see how it has evolved so far, what the possible future is, and what forecasts say. http://www.doksihu 6 The structure of the thesis will be to first go far back in the history, and highlight the main points concerning economics and foreign relations that, along the years, have led the six Gulf States to the present situation. Then a brief analysis will be provided about their current economic situation, underlining the key

areas that can have relevance on answering our questions; after that the next step will be to see the Gulf States foreign policies and their relations to some selected countries and territories. The last chapter, the closing one, will take us to possible future scenarios, and will draw the conclusions, trying to answer those many questions posed above. Answering the questions and concerns mentioned above is not only interesting, but is increasingly important to think about, as the outcomes are determining the current and future situation of the global energy market, and of powers in global politics. http://www.doksihu 7 2. History of the member states of the Gulf Cooperation Council 2.1 Ancient times The Persian Gulf region had accommodated various cultures and civilizations known from around 5000 B.C At the early times the coastal area of the region was homeland for the ancient Dilmun civilization, the North East part of the Arab Peninsula was taken by the Sumerians, while, due to

the harsh climate, on the rest of the Arab Peninsula mainly nomad Arab tribes were spread around. The Dilmun civilization, with proper roads and houses and with well-developed markets, was an important linkage between Mesopotamia and the Indus Valley up to around the 2nd millennium B.C; while Sumerian city state system had become a model of governance that influenced the governance set-up of Middle East. Their economy was mainly based on agriculture and fishing, and they had a wide-ranging network of trade with other empires around the Gulf region and further, with the Dilmun civilization, Anatolia and the Indus Valley.1 Around 1800 B.C the trade routes of the Dilmun civilization to the Indus Valley were cut, which caused a major decline in their trade activities.2 A new trade route was developed to link India to the Mediterranean Sea, through the Arabian Sea, and the Red Sea; thus a strong trade competition arose for the people living in the coasts of the Persian Gulf. The decline of

Dilmun trade meant a decline of welfare of people in Babylon as well, due to their dependence on external trade. Dilmun returned to prosperity when the Assyrian Empire stabilized its rule in the Mesopotamian area, and became an important fishing and pearling centre. In the 4th century, the Parthians took control over the whole Gulf region, including Oman and trading in the Persian Gulf moved under Persian control. Meanwhile, people of the Arabian Peninsula were grouped into tribes, most of which had a nomadic or semi nomadic lifestyle. There were only a few small kingdoms and 1 Summarized from: Mesopotamia (The British Museum) http://www.mesopotamiacouk/menuhtml (downloaded on 06.082009) 2 Summarized from: Country Studies, Library of Congress, edited by Helen Chapin Metz, 1993, http://countrystudies.us/persian-gulf-states/ (downloaded on 24032009) http://www.doksihu 8 city states, mainly around the oasis areas and trading hubs, which were originally settled to service the caravan

trade system. The Arab tribes survived on oasis gardening and herding in the first place.3 They started domesticating and saddling camels around 1000 B.C and that resulted in being able to transport large loads, thus in an increasing volume of trans-Arabian trade.4 The goods were shipped from India or other overseas areas and then put onto caravans in Arabia. The increased trans-Arabian trade had three major impacts on the development of the region. One was the rise of cities which were able to provide services for the caravans. Mecca, the major trading city of the Kingdom of Quraysh, arose in this ambient. As shipping and overland transportation became connected, the nomad tribes started to settle down at the coastal areas and mix with the people there. This caused the second major effect, "Arabization" of the gulf people The third mentionable impact was the contact of the Arabian tribes with the external world. However, the people of Arabia, as their goods were in high

demands regardless the ruling power, did not interfere with the political issues of the changing empires. 2.2 The birth and spread of Islam 2.21 Understanding Islam ―This day have I perfected your religion for you and completed My favour unto you, and have chosen for you as your religion Islam.‖ (Quran, Surah V:3)5 Islam was formed in a largely illiterate, nomadic culture, on the Arabian Peninsula. Politically, Islam was not a unified territory nor was there any centralized government. The Peninsula is predominantly desert and the tribes who inhabited this area travelled from place to place. Islam integrated elements from other cultures that Muslims met through their journeys, unless they threatened the basic values of Islam, thus it absorbed the heritage of Greece, Rome, Judaism, Christianity, and the Near East. 6 3 Strabo: Geography, Book XVI (Loeb Classical Library, USA, 2000, Chapter iv. 1-4, 18-19, 21-26, c 22 CE) 4 Summarized from: Arabian Peninsula (The Metropolitan Museum

of Art) http://www.metmuseumorg/toah/ht/04/wap/ht04waphtm (downloaded on 06082009) 5 Quran, Surah V:3 6 Summarized from: Islamic Affairs Department, Royal Embassy of Saudi Arabia: The Religion of ISLAM, http://www.templemountorg/islamiadhtml (downloaded on 11082009) http://www.doksihu 9 Islam describes itself to be destined to create a civilization and unite all the people in the world. It is tolerant towards other cultures and religions, and as it has been said earlier, it actually incorporates them in its own settings. The sense of brotherhood and sisterhood in Islam is majorly important.7 The Islamic law, the sharia, defined in the Quran, governs the life of Muslims and as it is said, it caters to the needs of Islamic society. It is essentially preventative, and uses harsh punishments only as a last measure. Respect for the rights of others is a basic element in it.8 2.22 History and evolution of Islam Muhammad was born in 570 A.D in Mecca Mecca at this time was an international

trade centre and as it gained control over the trade routes that were connected with the Far East trade, the people of Mecca became incredibly rich. Meanwhile, the city kept its traditional tribal settings, and polytheistic cult.9 Muhammad worked as a merchant assistant, travelling the main trade routes of Arabia, when he also encountered Judaism and Christianity. Later he married to the widow of a wealthy merchant and became a social activist - he found that the increasing wealth was bringing a breakdown in the society. He fought against the unjust treatment of the poor and needy. In 610 he was meditating on a mountain, when, as it is said, angel Jibreel visited him, and this was when Muhammad started to preach. He managed to gather some followers, but Meccan authorities, found his views dangerous on their economic and social dominance in the region, as one of his main messages was to be generous with ones wealth. They tried to quiet him so Muhammad left Mecca in 622, to Yathrib This

is called hegira ("breaking of formal times"), and it marks the beginning of the Islamic calendar. Yathrib was later renamed to Medinah, "The City of the Prophet" In Medinah Muhammad established the first Islamic community, creating their own legal system and rules. The community behind him became strong enough by time to conquer Mecca in 624 and to turn it into the centre of Islam. 7 Islamic Affairs Department, Royal Embassy of Saudi Arabia: The Religion of ISLAM Islamic Affairs Department, Royal Embassy of Saudi Arabia: The Religion of ISLAM 9 BBC Audio Journey: Islam, http://www.bbccouk/religion/religions/islam/history/muhammad 2shtml (downloaded on 11.082009) 8 http://www.doksihu 10 In the early 7th century Muhammad and his successors took up the Arabic custom of making raids against their enemies, which the Quran called jihad and it became an important tool for expanding the new religion. When Muhammad died in 632, his father-in-law, Abu Bakr took the lead

as the first caliph; he managed to consolidate Arabia into one country. By 650, during the rule of Umar, the Islam conquered the entire Persian empire. Umar also established the basic practices of Islamic governance When a later caliph, Muhammads son-in-law was assassinated, a general, Muawiyah came to power. This is the basis of the still existing split between the Shiites and Sunnites: Shiite Muslims claim that the caliphs can only be the descendent of Ali, Muhammads son-in-law; while Sunnite Muslims accept the descendants of the Umayyad dynasty as the true rulers. The Umayyad caliphs, who ruled for about a century, moved their capital to Damascus, and established the basic social and legal institutions of the Islam society were. Islam continued its expansion, to North Africa, Central and East Asia, as well as to Europe. From the 8th century the Abbasid dynasty succeeded the Umayyads, with Baghdad being their capital. Islam turned into a centre of learning and culture: Arabic,

Byzantine, Persian, Indian cultural traditions got integrated at once.10 In 1258 the Mongol ruler Hulagu conquered and destroyed Baghdad, and took control from the Sinai Desert to India. Soon they converted to Islam, and the capital of Islam moved to Samarqand. Mongols were in power till around 1500, until the Ottoman power became the dominant power in the Islamic world. 2.23 The Gulf in the medieval The whole Gulf region embraced Islam from the very early years, around 630 A.D During the Umayyad and Abbasid rules maritime trade and pearling industry increased significantly. The demand for pearl grew especially in the East, and trading activities reached as far as China. With the expansion of mercantile activities, trading settlements 10 Steven Kreis: The History Guide (1998-2008), http://www.historyguideorg/ancient/lecture18bhtml (downloaded on 17.082009) http://www.doksihu 11 began to grow notably in the area, so much that by the beginning of the 16th century they got in the

centre of attention of European explorers. 2.3 The epoch of colonialism When in the 16th century Vasco de Gama discovered the sea route around Africa, the Portuguese got in touch with Muslims in the Persian Gulf area. They shipped to India, and gained control over the trade routes in the Indian Ocean, as well as in the Arabian Sea. They transported goods between India and Europe, using the trade route around Africa, and ports in the Persian Gulf, such as Hormuz, and Muscat. By the end of the 16th century the Portuguese took control over the local trade, and though they let the local rulers stay in power, they collected tribute. Driven by the fear that the Portuguese would interfere more in the local governance, the shah of Iran invited the British and the Dutch to protect the Gulf. The British acted faster and defeated the Portuguese at Hormuz in 1622.11 Their interest in the Persian Gulf related to the newly founded East India Company - one of the two main shipping routes that the

British used between England and India was through the Gulf. However, British dominance in the Gulf only got significant in the 18th and 19th centuries. In the meantime, the territory of todays Bahrain was taken back under Persian influence in 1603, which was followed by almost 200 years of changing Arabic and Persian rule. In 1783 Arabs succeeded finally, and they started to build up a great wealth by bringing back the importance and intensity of trade, especially with India. In Oman in the 18th century there was a migration of Arab tribes from Central Arabia towards the coastal area became more intense, as it offered agriculture and pearling to people, and an access to the Indian market. On the inland of Arabia the Ottoman Empire ruled between the 16-19th centuries. Kuwait and Qatar were also under their control for 2-3 centuries During height of the European colonial expansion Ottoman territories were the few exceptions in the Arab world not being under colonial rule. In the

beginning of the 19th century the number of attacks on British shipping increased in the Gulf, thus the British initiated the General Treaty of Peace in 1820 with the 11 Helen Chapin Metz (1993) http://www.doksihu 12 sheikhs of the Trucial Coast and Bahrain. The object of the General Treaty was the "pacification of the Gulf"12. It provided for the "cessation of plunder and piracy by land and sea"13 on the part of the parties to the agreement; and it prohibited the slave traffic in the region. In 1835 the British replaced the General Treaty of Peace with the Maritime Truce, with the object of cessation of all hostile activities, piratical or warlike, by sea, for a fixed period of six months. In 1852 this Truce of 1835 was replaced by a permanent treaty known as the Treaty of Peace.14 The new treaty provided for the complete cessation of hostile acts by sea of the part of the parties subscribing to it. Qatar, which had been claimed as Bahrains dependency for

historical reasons, and was regarded such by the British Government, automatically fell under the operation of the Maritime Truce in 1835. An agreement was made in 1868 then, which stated that the sheikh of Qatar would maintain friendly relations with the sheikh of Bahrain; and it would also keep the maritime peace. Although regarded as an independent state, Oman had maintained a friendly relationship with the British from the 18th century. The two Agreements that the Sultan signed with the United Kingdom in 1822 and 1845 both provided for the suppression of slave trade, empowering British cruisers to seize any ship that carried slaves. In 1892 the British proposed the Exclusive Agreement15, which set up a British protectorate for the Trucial Sheikhdoms and for Bahrain, and the contracting local sheikhs agreed to give authority to the British Government in leading their foreign affairs and not to allow residence within their territories of any foreign agent without the consent of the

British Government. Within a few of years Qatar and Kuwait also signed this Agreement. 2.4 In search for the “black gold” In the beginning of the 20th century the Anglo-German naval rivalry pushed both countries to use petroleum as fuel for their battleships, and then soon for all their military vehicles. This idea, then, was followed by many other countries in the Western 12 Husain M Al Baharna: The legal status of the Arabian Gulf - A study of their treaty relations and their international problems (University of Manchester at the University Press, 1968, p.26) 13 Husain M Al Baharna (1968) 14 C.U Aitchison: A collection of treaties, engagements and sunnuds relating to India and nearby countries – Turkish Arabia, Persian Gulf, Arabia and Africa (Obscure Press, USA, 2008) 15 C.U Aitchison (2008) http://www.doksihu 13 world, which had been seeking for solutions to strengthen their military power. As the demand for crude oil was increasing continuously, the Western countries

started to realize that they had to search for alternative resources of oil, as their own resources were either non-existent or insufficient.16 In 1908 British prospectors struck upon oil at the Persian side of Suleymaniye (Turkey), then in 1911 the Anglo-Persian Petroleum Company (APOC) found oil in Iran. The next one of the newly discovered oil-rich territories was Iraq, after the World War I. The importance of petroleum in a global context became clear during the World War I. The use of oil gave military vehicles a number of advantages, thus it became a strategic commodity. A steady supply was required by Western countries in order to be able to be competitive both in war and in their economic production. The Iranian oil was a popular target for many countries to satisfy their oil hunger, Russia, the Unites States, and Great Britain were trying to get the most out of its potential. To overcome the challenge of the competition, the United Kingdom found its obvious answer for where to

find petroleum: the treaties signed between Britain and the Persian Gulf states had already given Britain political authority in the region, and these states had basically the same geological traits as Iran did. From the 1920s onwards a number of searches were made on the Arab side of the Persian Gulf, all the way to Oman. The first successful exploration was in Bahrain in 1932, which was followed by success in Kuwait in 1934, in Saudi Arabia in 1936, in Oman in 1937, in Qatar in 1939, and last but not least, in 1958 high quality petroleum was found in Abu Dhabi.17 Not until the 1970s had Gulf States had total authority over oil business and oil companies on their territories. The reasons behind that were various In the 1920s and 1930s the Japanese cultured pearl re-arranged the global pearl market, destroying the pearling industry in the Persian Gulf. Especially Bahrains and Qatars economies suffered from it the most.18 The Trucial Sheikdoms were trying to recover their missing

pearling revenues from shipping. Meanwhile the global economic crisis between 1929 16 T. Yu Lyubimova and V N Koshele: The Beginning of Industrial Oil Producing and Refining (Petroleum Chemistry, 2008, Vol. 48, No 2 pp 131–132) 17 IBRD: Economic Development of Kuwait – Report of a Mission Organized by the International Bank for Reconstruction and Development (Johns Hopkins Press, USA, 1965) 18 Helen Chapin Metz (1993) http://www.doksihu 14 and 1933 also affected the area, their depts were continuously growing. These factors explain that the Persian Gulf countries did not even have the technical or the financial background to explore and extract petroleum on their own. Most of the searches were initiated by the APOC in the beginning; however, new competitors came up soon. The US based Standard Oil of California was benefiting from the Bahraini and Saudi oil, and in 1933 they signed a 75-year concession with Saudi Arabia. In Oman the British could keep their position, Shell

being the biggest shareholder the Petroleum Development Ltd. Kuwait Oil Company was shared between the British Petroleum Company and the Gulf Oil Company (US), and Qatar Petroleum Company was a concern of Anglo-Dutch, French and US interest.19 Despite finding most of the oil resources in the 1930s, exploration of commercial quantities, and exportation did not begin until after the World War II and oil started to bring wealth to the Persian Gulf countries only from the 1950s. Kuwait grew fastest in the region, and by 1953 it was the largest oil producer country of the Gulf. Increasing oil reserves in the following two decades brought prosperity for the Gulf States, and a rapid development of governmental and private activities started in various fields such as construction, transport, banking, trade and public services. An additional effect of this development was a stream of immigration, mainly from other Arab countries, which provided with the necessary extra labour. In 1960 five

countries, including Kuwait and Saudi Arabia, founded the Organization of Petroleum Exporting Countries (OPEC). Within a couple of years only Qatar and the United Arab Emirates were among the members also.20 2.41 Independence of the Gulf States Losing India and Pakistan as its colonies in 1947, and trying to recover from the sacrifices of the World War II, the United Kingdom had lost interest in keeping its ties 19 IBRD (1965) OPEC: History of OPEC, http://www.opecorg/aboutus/history/historyhtm (downloaded on 05.082009) 20 http://www.doksihu 15 to the Gulf region. By the 1960s their intention to leave was clear, and soon the Gulf countries, which had been bound to Britain, one by one declared their independence. The first state to terminate its treaties with Britain was Kuwait, in 1961, but it immediately ran into a conflict when Iraq claimed its territory. The British and the Arab League managed to intimidate the Iraqis, who finally recognized the independence of Kuwait in

1963. In 1971 Bahrain declared its independence, which was followed by Qatar within a few months, and by the end of the year the United Arab Emirates was formed. Oman, although it had been independent all along, had internal issues and a rebellion took place between 1964 and 1976, threatening the safe oil exploration in the state.21 Saudi Arabia, meanwhile, joined the United Nations in 1960, and started to play a bigger role in the regional and international politics. 2.42 1970s - Oil price boom The League of Arab States was created in 1945, with the purpose of uniting all Arab states and ensuring their welfare and the realization of their aspirations. Having this in mind, the member states support the sovereignty of Palestine against Israel.22 Thus when in October 1973 the Yom Kippur War began by a joint Syrian-Egyptian attack on Israel, all the Gulf states, most of them members of the Arab League, took the side of Syria and Egypt. Not like the US and some other Western countries, who

supported Israel. Parallel to this, OPEC member states decided to put an embargo on oil exports to the US, and to The Netherlands to punish them for the support of Israel. Soon the embargo was extended to other Western European countries and Japan. The embargo caused a 50% rise in the global oil prices, and caused an "oil shock" on the concerned countries. Solving their shock required a change in the behaviour at every level, when it came to use of energy.23 The Yom Kippur War ended within a few weeks only, but the oil embargo lasted 6 months more, and even after that the price of petroleum rose substantially. This process contributed greatly to the increasing wealth 21 Helen Chapin Metz (1993) Arab League: Pact of the League of Arab States (1945), http://avalon.lawyaleedu/20th century/arableagasp (downloaded on 05082009) 23 Robert B. Barsky, Lutz Kilian: Oil and the Macroeconomy Since the 1970s (Journal of Economic Perspectives, Volume 18, Number 4, Fall 2004, pp.115-134)

22 http://www.doksihu 16 of the Arab oil producing countries, raising them amongst the list of countries with the highest per capita incomes in the world. It also gave a growing political influence in their hands, which continued to be an immense threat to oil importing economies. The next oil crisis came when the Iranian Revolution made the Iranian oil supply inconsistent and unreliable for its customers in 1979-1980. Global oil prices tripled and this time it was the OPEC member states who tried to stabilize the situation and provide some extra supply.24 "So far, Saudi Arabia has helped to make up for the loss of Irans oil by boosting its own output nearly 30% to some 10.3 million bbl a day, close to the maximum that it is presently possible to pump from the Saudi fields." 25 However, from the growing oil prices, oil producing states benefited rather well, earning record profits. 2.5 Power plays and the question of regional stability Being in fear from the potential

effects of the Iranian Revolution, namely that extreme Islamist movements would distract its delicate Shiite-Sunnite balance, Iraq, led by Saddam Hussein, and attacked Iran in 1980. The Iran-Iraq War was ongoing between 1980 and 1988, and meant a serious threat on the regional stability of the Persian Gulf. Led by this threat, the other six states of the Persian Gulf decided to form a coalition, with the aim to strengthen economic and political cooperation and support peaceful development. They set up an organization called the Cooperation Council for the Arab States of the Gulf, known as the Gulf Cooperation Council (GCC), in 1981; of which the founders, and until now the member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. In the first 5 years of the Iran-Iraq war the stand of the Gulf Cooperation Council was rather neutral, and in their declarations they requested several times that Iran and Iraq would end their war. However, from around 1985,

for multiple reasons, the GCCs stand changed, and gave moral support to Iraq. One of the reasons was a basic policy, to support Arab development and hegemony in the region against the Persian origin 24 Equinox Consulting: Recessions in the US (2009), http://www.equinoxconsultingfi/artikkelit/recessionspdf (downloaded on 03092009) 25 Time: Business: Oil Squeeze (1979), http://www.timecom/time/magazine/article/0,9171,946222,00html (downloaded on 03092009) http://www.doksihu 17 Iranians; whilst a number of attacks on Saudi and Kuwaiti tankers were accounted to Iran also. Saudi Arabia and Kuwait provided financial support to Iraq to cover its war costs. However, they did not intend to move further than financial support: "None of the six conservative monarchies wished to be dragged into a war with an outcome that appeared dangerously unpredictable and with an initial Iraqi articulated purpose - to foster Arab hegemony in the Persian Gulf - that remained uninspiring." 26

After the Iran-Iraq war Iraqs economy was totally exhausted, due to the heavy war costs. Iraq had loans to pay back to Saudi Arabia and Kuwait, the loss of its social capacity was immense, and at the same time, the oil prices were kept on a low level globally, which was forecasting a longer time for the country to recover. In 1990 Iraq started to accuse Kuwait for its slump and also for keeping the oil prices abnormally low. In addition, Iraq revived some of its territory claims towards a part of Kuwait, and these reasons were enough for Saddam Hussein to make a decision of invading Kuwait in the very same year, starting the First Persian Gulf War.27 Needless to say: in contrast to the stand between 1980-1988, the Gulf Cooperation Council, as one person, stood up for Kuwait this time, against Iraq. When Iraq did not answer for the United Nations (UN) Security Councils call for Iraqs unconditional and immediate withdrawal from Kuwait, thus a coalition force of Middle East, Western and

GCC countries arrived to the Persian Gulf with the purpose of defending the borders of Saudi Arabia from further Iraqi invasion, and to drive out Iraqi troops from the territory of Kuwait.28 The largest portion of the offensive costs was covered by Saudi Arabia The actual war was over in February 1991 when the coalition forces gained back Kuwait from the Iraqi occupation, but the UN Security Council put strict sanctions on Iraq, in order to outpace another similar action, potentially caused by Iraq. During the 1980s oil prices started to decline, due to falling demand for oil in the global market after the second crisis in 1979, and also to the increasing number of non-OPEC oil production sites around the world. This caused a major decline in the Persian Gulf countries, especially to Saudi Arabia which had to cut its oil production by 75% from 26 Christopher C. Joyner: The Persian Gulf War: lessons for strategy, law, and diplomacy (Greenword Press Inc. USA, 1990), p93 27 Helen Chapin

Metz (1993) 28 Andrew Santella: The Persian Gulf War (Compass Point Books, USA, 2004) http://www.doksihu 18 1980 to 1985.29 The decline was not only economic-wise, but also affected the political influence of the Gulf countries in the world. The GCC countries started planning around increasing their non-oil incomes from the 1980s, change their economic structures and diversify the productive sectors. The major challenge about this plan, however, was that the performance of the oil sector had a great impact on their overall economic performance, which, in these years, resulted in the decline of trade surplus. In 1991 the Bank of Commerce and Credit International (BCCI), based in the United Arab Emirates, collapsed, causing a set-back around the world. 30 The years after the Iran-Iraq War and the First Persian Gulf War were defined with arranging border disputes between the Gulf countries, strengthening their international relations, and learning to use their wealth from

petroleum-income in a smart way. Most of the GCC countries started to re-install their diplomatic relations with Iran and Iraq; and they also provided humanitarian aid, and support for the reconstruction of the Iraqi economy. The relationship with the Gulf Cooperation Council member states and the Unites States of America during the 1990s was rather constructive, though in the 21st century it changed in some ways. A demonstrative contrast is that after September 11, 2001 Saudi Arabia was blamed by the US for not implementing effective counterterrorism measures (most of the terrorists in the attacks against the US were Saudis); while Oman and Bahrain look at the US as a strategic partner, Oman signing a free-trade area agreement with the US in 2006. Iraq subsequently violated the border agreements demarked by the United Nations in 1994, and this, amongst other reasons led to the Second Gulf War in 2003. This time a coalition of the United States and the United Kingdom went into a war

against Iraq, with the intension of cancelling Saddam Hussein from power. The GCC member states were not in agreement upon their stand on the situation, however, they issued a common declaration expressing that they reject any aggression on Iraq, and they actually refused US troops to be stationed on their territories. In the meantime, they 29 James L. Williams: Oil Price History and Analysis (1996-2007), http://wwwwtrgcom/priceshtm (downloaded on 24.082009) 30 Ali Tawfik Al Sadik: Evaluation and Performance of the UAE Economy 1972-1998, http://www.uaeinteractcom/uaeint misc/pdf/perspectives/10pdf (downloaded on 24082009) http://www.doksihu 19 requested Saddam Hussein to step back from power. Most GCC member states agreed on the initiative of placing Iraq under the charge of the United Nations and the Arab League and support the formation of a new government.31 From 1990 to 1997 the world oil consumption was dynamically growing (due to the rapid growth of South-East Asian

economies) which pushed up crude oil prices and brought back the strengths of the Gulf economies. After a sharp decline in oil prices in 1998, when most of the Gulf Cooperation Council states declined notably in their GDP, OPEC cut back crude oil production first in 1999, then several other times during 2000 and 2001.32 Until 2008 the demand for Arabic crude oil was constantly rising due to different local and international conflicts of other oil producer countries, putting back the GCC member states into an increasingly important, strategic place. 31 GCC-SG: The Closing Statement of the Twenty Second Session (2001), http://www.gccsgorg/eng/indexphp?action=Sec-Show&ID=124 (downloaded on 25082009) 32 James L. Williams (1996-2007) http://www.doksihu 20 3. The Gulf Cooperation Council 3.1 Background of founding the Gulf Cooperation Council By the 1980s, increasing oil production and regional instabilities became the main issues for states of the Persian Gulf. After the oil

embargo in 1973, revenues from oil production and exporting grew immensely, thus increasing the available funds for the countries. Meanwhile, the Iranian Revolution in 1979 raised a security threat and challenged the stability of the region; Gulf leaders faced the potential of spreading the extreme Islamist movement beyond the borders of Iran. Indeed, Irans strong antiWestern sense was in contrast with the close ties most other Gulf countries had with some of the Western European countries and the US. The outbreak of the Iran-Iraq War in 1980 put up more and deeper questions about regional security. Partially the regional security concerns, especially the one regarding the Iran-Iraq War led the six nonconfrontational countries, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates to form the Gulf Cooperation Council in 1981. Accordingly, the goals of GCC, besides the cooperation, coordination and integration of their economies, trade as well as social policies, were

also to strive for and maintain regional stability. 3.2 The organization The official name of the organization is The Cooperation Council for the Arab States of the Gulf, commonly known as the Gulf Cooperation Council (GCC). The GCC is an intergovernmental organization, and its headquarters is located in Saudi Arabia. The objectives of the GCC are set in the Cooperation Council Charter as follows: 33  Coordination, integration and inter-connection between the member states in all fields;  Deepening and strengthening ties between their people in various fields;  Aligning their regulations in various fields including economic and financial affairs, commerce, customs, communications, education and culture; 33 GCC-SG: The Charter of the Cooperation Council for the Arab States of the Gulf (1981) http://www.gcc-sgorg/eng/indexphp?action=Sec-Show&ID=1 (downloaded on 09032009) http://www.doksihu 21  Fostering scientific and technological cooperation and progress in

various fields including industry, agriculture and water resources;  Establishing joint ventures and encouraging the cooperation in the private sector. The organizational structure consists of three main entities: the Supreme Council is the highest authority of the GCC; it consists of the Heads of Member States. The role of the Ministerial Council, formed by the Ministers of Foreign Affairs, or other ministers acting on their behalf, is there to “propose policies, lay out recommendations, and encourage and coordinate the already existing activities in all fields‖34. The third entity is the Secretariat General, being charged with preparing studies, researches and reports related to the periodical work and performance of the GCC; and with preparing the regular meetings for the other two entities.35 All the member states of the Gulf Cooperation Council are members of the United Nations, and of the Arab League; Saudi Arabia, Kuwait, Qatar and the United Arab Emirates are members

of the OPEC. The GCC member states and 11 other Arab countries or territories are formulating the Greater Arab Free Trade Area (GAFTA). 3.3 Evaluation of GCC’s impact on its member states 3.31 Economic cooperation As it was one of the main objectives when founding the Gulf Cooperation Council, a major focus has been put on defining and implementing economic cooperation between the member states. In 1981 and 2001 the organization set clear long-term goals and action plans for the implementation process. The member states aim to provide economic nationalism for all GCC citizens; to enhance the economic integration process of the states; to ensure the convergence and unification of laws and regulations in each state; to improve the infrastructural integration; to improve the investment climate; to cooperate on social development, as well as on scientific and technical research and development.36 34 GCC-SG: The Charter of the Cooperation Council for the Arab States of the Gulf (1981)

GCC-SG: The Charter of the Cooperation Council for the Arab States of the Gulf (1981) 36 GCC-SG: Areas of Cooperation Achievements, Economic Cooperation - http://www.gccsgorg/eng/indexphp?action=Sec-Show&ID=47 (downloaded on 24032009) 35 http://www.doksihu 22 Some of the target time frames had to be pushed while realizing these goals, but generally the process itself is on track. The member states now offer a fully equal treatment among GCC nationals in all economic fields, including social services, such as social insurance, employment and education. The general strategies and policies have been aligned in the different countries, which supported the unification of rules and regulations. Many joint institutions have been set up; and basic infrastructure like roads, communications, and telecommunications are installed between the countries. In regards to the economic integration, major steps have been already realized also, and an important goal is just ahead of the countries

at the moment. The Gulf Cooperation Council forms a Free Trade Area since 1983, a Customs Union since 2003, and a Common Market since 2008. The next stage of integration is the Monetary and Economic Union, that is planned to be launched in 2010, including the implementation of the GCC single currency in four member states out of the six (Oman declared in 2007 that the country was not yet ready for such a development; and recently the United Arab Emirates decided to step back, not agreeing with certain principles)37. There are doubts if the planned date is realistic, however, no official postponement have been announced by the Gulf Cooperation Council. There in another element of cooperation that need to be mentioned, the GCC Petroleum Strategy, which was created in 1988, and ever since it coordinates the petrochemical trade activities of member states, in both within and outside of GCC borders. It contains "The GCC Regional Emergency Plan of the Oil Products", defines an

intra-GCC oil lending system, and disposes the set-up of the GCC Energy Team.38 3.32 Foreign affairs relations and international trade One of the drives for the Gulf Cooperation Council being established was the need for regional stability, and the contracting countries wished to realize this through cooperation and common political actions. The first priority in this regard has always been the facilitation of the regional peace progress, not only in the Gulf but in other 37 BI-ME: GCC single currency should be phased, says Kuwait central bank (2009) - http://www.bimecom/mainphp?id=40597&t=1&c=34&cg=4&mset=1011 (downloaded on 28092009) 38 GCC-SG: Areas of Cooperation Achievements, Economic Cooperation http://www.doksihu 23 Arab countries as well. Along the way, there have been certain disagreements between the member states over some regional issues, but as a general principle the GCC is against any kind of aggression and inhumanity, and is encouraging conflicting

groups or states to solve their disputes in a peaceful manner. The liberation of Kuwait from Iraqi invasion in 1990-1991 was largely financed by the GCC states; however, the GCC states have also been supporting the re-construction of Iraqi stability and integrity in many ways. They endeavour for better relations with Iran; and GCC facilitates the resolution of territorial disputes in the region.39 The Middle East peace progress is a regular question on the GCC agenda. The GCC has been supporting the independence and sovereignty of Palestine, Syria and Lebanon against the Israeli attacks and occupation; and has offered the recognition of an independent Israeli state, in return that Israel would commit to the peace and would stop aggression and attacks against Arab territories. Until this happens, GCC member states would not recognize the sovereignty of Israel.40 In regards to economic relationship building at the international level the Gulf Cooperation Council tends to act as a single

group. They have created a long-term strategy for international economic relations, and their prior focus points are Japan, the European Union, the United States, and other Arab countries. The goal is to increase volumes of trade, both of petrochemicals and of other products; to eliminate trade barriers; and to encourage investments. There are ongoing Free Trade Area negotiations with many other countries and trading blocs since 2003, but most of these negotiations are not finalized yet.41 39 GCC-SG: Areas of Cooperation Achievements, Political Affairs, http://www.gccsgorg/eng/indexphp?action=Sec-Show&ID=48 (downloaded on 27082009) 40 GCC-SG: Areas of Cooperation Achievements, Political Affairs 41 GCC-SG: Areas of Cooperation Achievements, Economic Cooperation http://www.doksihu 24 4. The current economic situation of the member states of the GCC 4.1 Overall economic situation and policies 4.11 Key drivers of the GCC economies "The Economist Intelligence Unit has

determined that the GCC’s annual GDP growth has been 5.2 per cent in the past decade and expects it to be 45 per cent in the next decade, compared to an aggregate global rate of 3.3 per cent"42 The Gulf Cooperation Council is one of the fastest growing regions of the world economy currently, along with the BRIC and N-11 countries.43 A dynamic economic development can be observed in the recent 5-7 years, with a real GDP growth up to 7% yearly since 2003. According to some forecasts, the peak is yet to come to the GCC, and there is even a possibility that within a few decades they would close the income gap with G-7 economies.44 What are the key growth factors and challenges that currently determine GCC economies? The member states of the Gulf Cooperation Council, in the first place, are crucial players on the global energy market. They own approximately 40% of the worlds known oil reserves, and they currently contribute with 22% to the worlds crude oil production, which puts the

GCC countries into a unique position. They are able to cover the growing demand for oil for many more years, whilst they are among the few countries in the world that can still expand their oil production capacities, thus they are becoming a key factor of global economic growth. However, this leads to a rather controversial situation: the oil revenues count up to approximately 50% of their total GDP and the price of this wealth is GCC economies being highly dependent on the unsteady global oil market. Their oil windfall was unexpectedly large between 2002 and 2007, due to stably high oil prices and a growing 42 Fawzi Jumean: GCC needs united profile with investors (2009) http://www.thenationalae/apps/pbcsdll/article?AID=/20090906/BUSINESS/709069950 (downloaded on 02.102009) 43 BRICs: Brasil, Russia, India, China. N-11 group: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, Vietnam. 44 Ahmet O. Akarli: The GCC Dream - Between the

BRICs and the Developing World, Goldman Sachs Group, Global Economic Paper No: 155 (17.042007) http://www.doksihu 25 global demand. Though, from 2008 the global economic crisis has set back the growth of the GCC economies notably, due to the unpredictable changes in the oil market. There is also a considerable amount of natural gas reserves to be found in the Gulf, altogether 23% of the worlds known natural gas reserves, Qatar owning the biggest share of it (14%), followed by Kuwait, the United Arab Emirates and Saudi Arabia. The production potential in the GCC countries is not yet fully exploited, despite the huge reserves they only contribute with less than 10% of the global gas production.45 The dependence on oil revenues has been a burning question for the GCC states since the 1980s when oil prices started to decline, moderately slowing down their economic growth for about two decades. The first plans to diversify the economies of some of the GCC countries were developed in the

mid 1980s, and ever since this issue is on the economic agenda of the Gulf. The main sectors that might play a key role in the diversification strategy are the finance sector, commodities, manufacturing and tourism. According to the latest statistics (2008)46, non-oil GDP growth has exceeded the oil GDP growth in almost all GCC member states, which is an important achievement; however, there is still a long way to go. The GCC is becoming a more and more important player as a global investor and trade partner, expanding its role as a regional trading hub. Gulf trade has risen steadily in the recent years, and it is continuously expanding especially towards South Asia. GCC is the fifth most important trading partner to the European Union, the largest part of Gulf imports is originated from the EU.47 The Gulf Cooperation Council has started negotiations on Free Trade Area agreements with several countries and groups, amongst others the EU, China, India, and Japan. Finance and investments

are also rapidly growing in the Gulf; Islamic Finance, even though its market share is relatively small yet, is one of the fastest growing sectors on 45 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel: The Gulf Cooperation Countries Economic Structures, Recent Developments and Role in the Global Economy (European Central Bank Occasional Paper Series No 92, 2008) 46 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 47 Dr. Christian Koch: Maintaining Momentum in GCC-EU Ties (Gulf Monitor, August 2009, Vol 3, No 2, pp.12-14) http://www.doksihu 26 the global financial markets.48 There are substantial USD investments in the United States owned by GCC states, just like some of the worlds largest Sovereign Wealth Founds (government owned investment funds) which have raised a global concern, as they are basically changing perspectives about investments on a global scale. It worth to mention, that the Gulf Cooperation Council is not only an important investor, but

is also attracting foreign direct investment in an increasing volume. This is due to the ongoing liberalization of their economies, and opening the doors for foreign investors. Along with this process the Gulf experienced a land and real estate boom, real estate and construction becoming key non-oil revenue sources.49 The private sector participation is growing in all GCC states, however, it keeps being one of the main challenges of the Gulf countries - private sector share in the GDP is still relatively low; the public sector plays a huge role in investments, development projects and employment of GCC nationals, which brings the question of sustainability on the longer run as the growth capacities of the public sector is limited. This issue is actually rooted at a deeper structural weakness, in regards to the distribution and use of economic resources. Even though the privatization initiatives seem to be successful, many of the major companies are still government-owned, and there are

still limitations towards foreign ownership of public and private organizations in most of the countries. Meanwhile, public expenditures are continuously increasing, mainly for social and physical infrastructure development projects.50 It is interesting to see that in the private sector in the GCC actually heavily relies on expatriate labour force (in average expatriate population builds up about 50% of the total population)51, while, on the other hand, the public sector is lacking the capacity to absorb the young and rapidly growing national labour force. The background of this is that the oil-wealth in the 1970s attracted a massive migration from other Arabic 48 Dr. Samir Ranjan Pradhan: Islamic Finance in the GCC: Trends, Prospects and Challenges (Gulf Monitor, August 2009, Vol. 3, No 2, pp4-10) 49 Deloitte M.E: GCC powers of construction – GCC factsheet (2009) http://www.deloittecom/view/en LB/lb/industries/realestate/article/35120c60ae904210VgnVCM200000bb42f00aRCRDhtm

(downloaded on 02102009) 50 Ibrahim Saif: The Oil Boom in the GCC Countries 2002-2008, Carnegie Papers No 15, March 2009 (Carnegie Middle East Center) 51 MENAFN Press: Global: GCC market review – September 2009, http://www.menafncom/qn news story sasp?StoryId=1093271482 (downloaded on 02102009) http://www.doksihu 27 countries, as well as from South Asia, who provided a cheap labour force for the private sector, and the relatively small national population could take up the public positions. Another major concern of the GCC countries is the regional instability that highly affects their economies since several decades. As the Persian Gulf itself is an important trading route, it is extremely important for the Gulf States to keep it safe and attractive to international trade. The conflicts around the region, especially in Iraq and Iran, mean a constant threat to this. 4.12 Economic policies applied in the GCC When the governments of the countries in the Gulf Cooperation Council

plan their economic actions, there are a number of considerations they all take, to more or less extent. Building on traditions and religion; wealth creation for their societies; developing and modernization of their countries; and taking up responsibilities in the global economy are shared visions of all member states, and the way they approach the realization of these visions is also similar. First of all, being Muslim countries, economic policies in the Gulf Cooperation Council shall be in alignment with the Islamic law and traditions. Even though Islam does not have a single set of policies on economics, there are a number of basic rules and teachings to follow, and that have a strong impact on how Muslim countries drive their economic issues. Some of the most important ones are as follows:52  Everybody is obliged to cater for the living by their own labour.  The poor and needy have a claim to be sustained by the society.  Monopolization is forbidden.  Interest

rate is prohibited.  Ensuring stability, avoiding risk, in every aspect of the economy, is required. These points are fundamentally built in the Gulf economic policies. They appear in the behaviour of the governments, in the daily economic decisions of civilians, and there 52 Volker Nienhaus: Islamic Economic System – A Threat to Development? http://www.fnstfreiheitorg/uploads/896/Nienhausenlischpdf (downloaded on 03102009) http://www.doksihu 28 are even some specific systems, for example the Islamic Finance system, that is meant to align some key financial areas with the sharia. Coming from the historical background, the role of the government in the GCC economies is quite different than in most European countries. The way the governments role is perceived is to actually create wealth - by building infrastructure, providing social services, and also by creating employment and offer attractive wages. As far as the government is fulfilling this role, there is very little

interest from the civilians side to participate in politics and policy making. 53 This leads to several economic consequences. The governments are the owners of some of the main national companies, thus a large part of the national income is not generated by the private sector, but by public or partially government-owned companies. Government expenditure is used to translate these revenues into higher investment and consumption; meaning that the government finances large investment projects, mainly on physical infrastructure development (power generation, water supply, transportation, housing, etc.) and social services development (education, health care, etc), whilst they increase public sector wages - all this in order to share the increased wealth with the civilians. On the other hand, only a very low percentage of government incomes come from taxation (in average it is about 5% of the national incomes).54 This means that the government is not asking for the contribution of a

civilian to the national budget, but in return, it expects the civilian to enjoy their wealth without willing to participate in leading the country and in managing the national affairs. As a consequence, there is a lack of transparency and good governance from the public sectors side. Another important goal on the policy agenda of the Gulf countries is the diversification of their economies: to ensure the sustainable long-term development of the countries, becoming more independent from uncertain factors by providing a wider scale of revenue sources. It is important to mention that some key sectors such as infrastructure development and real estate are owned majorly by national companies, while for example the financial sector is getting more and more liberalized across the countries. 53 General Secretariat for Development Planning of Qatar: Qatar National Vision 2030 http://www.investinqatarcomqa/about/qatar%20vision (downloaded on 03102009) 54 Michael Sturm, Jan Strasky, Petra

Adolf, Dominik Peschel (2008) http://www.doksihu 29 As far as participation in the global economy and in international trade activities is concerned, the Gulf Cooperation Council tends to act as one unit. According to the Common Market launched on 1 January 2008 member states of the GCC shall align their trade policies, and avoid conflicting in bilateral trade agreements as individual countries. This policy has been the basis of a recent debate within the GCC, as the United States, disregarding regional and subregional cooperation in the Middle East and North Africa (MENA), has started to negotiate FTA agreements with individual countries only, and some of the offers from the US are against the Custom Union agreement existing between the GCC countries since 2003.55 Recently the Gulf Cooperation Council has become part of the international policy debate on global imbalances. There is a risk arising, that, if global imbalances keep on growing at the current speed, it would lead to a

severe drop in economic growth - this possibility has already showed its face to the world in the current global financial turmoil. To avoid such a situation, key players of the global economy such as the US, the EU, Japan, the countries of emerging Asia and oil exporting countries (including the GCC) have been called together to find solutions. As part of the solution, oil exporting countries would strengthen their economic diversification, to ensure that petrodollars would flow back to oil importing countries, moderating global imbalances.56 4.2 The global economic crisis in the GCC "We are reasonably optimistic that GCC economies have weathered the global financial crisis without systemic threats" (Dr Alaa Al-Yousuf, Chief Economist, Gulf Finance House) 57 The global economic crisis that accelerated in mid 2008 affected the member states of the Gulf Cooperation Council the most in some of their key sectors: oil, investments and construction industry. The GCC countries have

not been exposed to systematic 55 Prof. Nader Habibi, Dr Eckart Woertz: US-Arab Economic Relations and the Obama Adminstration (Gulf Monitor, March 2009 Vol. 3, No 1), pp4-11 56 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 57 Rana Mesbah: GCC economies bearing three-pronged brunt of global financial turmoil, says GFH economic report (2008) - http://www.ameinfocom/174561html (downloaded on 28102009) http://www.doksihu 30 shocks due to the strong fundamentals that they were able to build up over the previous few years, however, their economic growth have notable slowed down between the second half of 2008 and 2009, some of the countries (Kuwait, Saudi Arabia and the United Arab Emirates) are experiencing negative GDP growth for 2009.58 Given the fact that the GCC countries are oil exporters make them highly dependent on the global economic activities. As mentioned in the previous chapter, oil windfall by the growing oil prices between 2002 and 2008 brought a great

wealth to the region. As the global financial crisis started to unfold, oil prices have roller-coasted: from a balanced growth curve in early 2008 they jumped up to record $ 141/barrel in July, to then fall by 70% below $ 40/barrel in the following 6 months. The falling oil price was mainly driven by the dropping demand, as first the US, the OECD countries, and then the developing world experienced a sharp economic slow-down.59 This has set back the windfall savings in 2008 and 2009, decreasing governmental revenues. The GCC stock markets were hit hard in the second half of 2008, indices showed 3060% drop in the last quarter of the year. The withdrawal of foreign direct investments from the region has been a major cut in some of the countries, most visibly in the UAE. Over 2008, Dubai equities saw an outflow of capital up to 3% of the GDP.60 However, in other states of the Gulf this factor has not led to such a critical situation, and countries implemented various measures and

mechanisms to support and regulate the stock market, and to maintain liquidity. The other aspect of the investment sector is the investments of the GCC countries, both domestically and at international level. As far as the domestic investment projects are concerned, the feasibility and cost-effectiveness of these projects had to be reviewed, in order to avoid project deficits and liquidity problems. Due to the falling reserves of banks and increasing interbank rates, projects had to face rising costs of loans and declining availability of credit facilities in a large volume. The international investments also dropped, some estimates suggested that, for example, around 30% of 58 World Bank: Q&A on the Global Financial Crisis and MENA (2009) http://go.worldbankorg/JJGFYYAX20 (downloaded on 28102009) 59 OPEC Secretariat: World Oil Outlook 2009 (2009) 60 Rana Mesbah (2008) http://www.doksihu 31 the Sovereign Wealth Funds portfolio value was lost during the accelerating crisis in

2008.61 The crisis has also highlighted some weaknesses of the financial and banking sector in the GCC. Growing population of the Gulf and the economic booms have brought a sharp increase in consumer markets, real estate, and mega-projects have been run by governments in order to fulfil infrastructural needs. All these require an increased volume of financing, financial services and insurance, that the finance sector was not yet prepared for. As a result, reliance on external bank financing has been increasing62 Reacting on the global crisis, GCC countries started to support their banking systems and stock markets, to ease monetary policy, and stabilization packages are being developed recently. "Looking forward, there is a need to continue to diversify the financial sector, and more broadly the economy. Doing so would reduce both volatility in economic activity and financing costs for private investment, which is key to providing jobs for a growing labour force." (Dominique

Strauss Kahn)63 The construction industry, which is one of the largest non-oil income source of the Gulf economies (in Saudi Arabia it contributes with 4-6% to the GDP, in the UAE it is 810%), has suffered from faltering demand for building materials, and increasing prices of transportation. Projections suggest that until 2010 the construction sector will not be able to fully recover from its set-back.64 By the second half of 2009, almost all areas have seen rather optimistic prospects. Oil prices first stabilized around USD 50/barrel in spring 2009, then slowly started to grow again from July on, to a USD 65-75/barrel range in autumn 2009. Investment atmosphere is better than expected; and 2010, according to estimates, will be a year of positive GDP growth again, for all the countries.65 "This group is in the best position to 61 Brad Setser, Rachel Ziemba: GCC Sovereign Funds (Council on Foreign Relations, Working Paper, January 2009, downloaded on 28.102009)

http://www.cfrorg/publication/18017/gcc sovereign fundshtml?breadcrumb=/region/400/gulf states 62 Kevin Carey: Global Financial Crisis: A GCC Perspective (World Bank MNA K&L Fast Briefs, December 2008, Number 13) 63 IMF Press Release: IMF Managing Director Dominique Strauss-Kahn Commends Gulf Cooperation Council Countries’ Resilience in Face of Global Crisis (2009) http://www.imforg/external/np/sec/pr/2009/pr09361htm (downloaded on 28102009) 64 Deloitte M.E: GCC powers of construction GCC factsheet (2009) 65 MENAFN Press: Global: GCC market review – September 2009 (2009) http://www.doksihu 32 absorb the economic shocks. They entered the crisis in exceptionally strong position. This gave them a significant cushion against the initial impact of the global financial crisis." (Auguste Kouame, Acting Chief Economist for the MENA, World Bank) 66 As of 26 November 2009, followed by the announcement of the Dubai’s Department of Finance that they would delay to pay back its

depts due by 14 December 2009, the London Stock Exchanges crashed for a couple of hours, and global stock markets have been shaken. In contrast with other states of the UAE Dubai is not rich in oil reserves, however, it has been financing its mega-projects from oil revenues. As revenues dropped over the past one year, the construction projects of Dubai aggregated a large amount of depts and Dubai World67 is now unable to pay back its credits on time. ―The biggest underlying fear is that Dubais problems could reignite the financial turmoil of the credit crisis. That would lower global demand for a whole range of commodities, including oil.‖68 4.3 Analysis of the oil industry ―We live in an increasingly interdependent world. And central to this is the global energy system, something on which billions of people rely on daily, from both the social and economic perspective. It is an increasingly complex system, where the right decisions need to be made in a timely manner, as the

relationships between the major facets of the industry become ever more intertwined.‖ 69 (Abdalla Salem El-Badri, Secretary General, OPEC) First we need to review some of the most important data about the global energy system. Almost half of the world energy consumption (426%) is made up by oil, followed by electricity (17.1%) and gas (156%) The alternative energy sources such as combustible renewables, waste, solar and wind energy, amongst others, contribute with 15.9% to the global consumption This ratio has been more or less stable in the past 35 66 World Bank: Q&A on the Global Financial Crisis and MENA (2009) Neil Shah, Cassel Brian-Low: Dubai World Bond Values Plunge as Investors Fear Contagion, http://online.wsjcom/article/SB125926385003265397html (downloaded on 26112009) 68 Stephanie Flanders: Share markets hit by Dubai dept fears, http://news.bbccouk/2/hi/business/8382103stm (downloaded on 27112009) 69 OPEC Secretariat: World Oil Outlook 2008 (OPEC Secretariat, 2008)

67 http://www.doksihu 33 years. If we observe the regional distribution of the global energy, we can see that the OECD countries, i.e the developed world has a 455% share in the total energy consumption, while China itself is taking up 15.2%, and Asia (without China) is the third biggest energy consumer with 11.5% The dependence on oil imports is the highest in the European Union, 79% of oil used in the EU needs to be imported. On the production side, 34% of the energy sources produced globally is oil, 26.5% is coal, and 20.9% is gas The alternative energy sources add up to 127% of the global energy supply. The top three major energy suppliers are also the OECD states, China and Asia.70 The major crude oil producers are Saudi Arabia (12.9%), the Russian Federation (12.3%), the United States (76%), and Iran (54%) as follows, however, if we combine the GCC production, with its 22% share in the global oil production it is far ahead of the others. It is interesting to see, that

although both the US and China are in the top ten oil producers in the world, they are not amongst the major oil exporters, as their domestic consumption uses most of their production. Both countries are actually in the top three crude oil importers of the globe.71 Oil prices are determined by four main factors: supply and demand; the availability of non-renewable energy sources (the sources or reserves behind the supply); market structures and political power; and uncertainty.72 We can find some historical examples on this. Oil prices were relatively balanced until 1973, when OPEC members decided to cut the supply to the US and to some Western European countries, due to political reasons. Their decision created first of all a shock, as these countries simply did not have enough reserves of energy sources to keep their economies going, then an oil price boom, as the value of oil suddenly overgrew. The oil price shocks of 1973 and 19791980 shook the global economy, and drove

industrialized economies, to think of ways to become more self-sufficient in terms of energy sources. They put a lot of effort in energy conservation, boosting energy production and finding alternative ways to supply their energy needs, however, when oil prices started to fall in mid 1980s (partially due to the decreasing demand), these efforts were put aside. 70 International Energy Agency: Key World Energy Statistics 2009 (IAE/OECD 2009) International Energy Agency: Key World Energy Statistics 2009 72 J. Cale Case: Oil Pricing, in “The New Global Oil Market: Understanding energy issues in the world economy”, edited by Siamack Shojai (Praeger Publishers, USA, 1995) 71 http://www.doksihu 34 It seems like a vicious cycle, but there are efforts to get it balanced. The role of the Organization of Petroleum Exporting Countries (OPEC) “is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an

efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry‖73. The real impact of the OPEC is argued by many, but they certainly are an important pole of energy policy making. Another important participant on this field is the International Energy Agency (IEA), established by the OECD, after the oil shock in 1973. IEA ―acts as energy policy advisor to its member countries in their effort to ensure reliable, affordable and clean energy for their citizens.‖74 Even though OPEC is only dealing with the oil industry, and IEA has a broader view on the whole energy market, their cooperation is crucial for a sustainable and balanced global energy market, especially for linking the supply and demand sides of the market. The Gulf has become one of the most important players on the supply side of the market. As the domestic consumption of oil is far less than their production, they have a huge capacity to export

crude oil to other countries and regions. The US has been one of the main recipients of Gulf oil, though the growing demand for crude oil in emerging economies is notably shaping the regional distribution of Gulf oil exports. The oil demand market has started to shift from the Atlantic community to Asia; and China, Japan, India, South Korea and ASEAN member states are growing out as major consumers of oil from the Gulf monarchies.75 Oil reserves in some of the GCC countries, at the current production volume, are most likely to be enough for at least a hundred more years.76 This places these countries into a unique position, as they will be able to cover future oil demand at a rational production cost. In addition to that, as exploration and exploitation costs are relatively low, in comparison to the global trends, exploration and development of new oil fields will continue, increasing production capacity of the region. GCC states are also 73 OPEC: History of OPEC International Energy

Agency: About the IEA http://www.ieaorg/about/indexasp (downloaded on 03.112009) 75 Dr. Samir Ranjan Pradhan: India, GCC, and the Global Energy Regime (Academic Foundation, UK, 2008) 76 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 74 http://www.doksihu 35 planning to increase their refinery capacity, which would be a crucial step in mitigating current global refinery capacity shortage. However, the growing demand for oil creates a growing environmental concern at the same time. Energy efficiency, environmental destruction caused by the oil refineries and the need by the oil industry for increased transportation; are issues that need to be addressed by both energy suppliers and consumers. The global community expects the Gulf Cooperation Council, as major oil producers, to take a leading role in dealing with sustainability issues, especially with sustainable energy sources. As an answer to this challenge, Gulf States have undertaken projects related to reducing

carbon emission, and creating environmentally sustainable communities. Masdar City, in the United Arab Emirates, is the worlds first zero-carbon, zero-waste city fully powered by renewable energy. Similar initiatives are being developed in Saudi Arabia, and energy efficiency and renewable projects are underway in all GCC states. A recent major step ahead has been that the International Renewable Energy Agency chose Abu Dhabi, capital of UAE, as their headquarters. As this brings attention to the Gulf, in regards to their activities reducing carbon emission, it means both a tough challenge, and a huge opportunity for the region to be role models, and maintain their key role in the oil industry at the same time.77 4.4 The diversification strategies The share if oil revenues in the GDP of the GCC countries are close to 50% in average, increasing from 30.8% in 2002 Oil revenues make up 80% of the government revenues, and crude oil accounted for 70% of total exports between 2003 and 2007.78

These facts show that it is not only the global energy market is dependent on Gulf oil, but the Gulf countries are also dependent on the global energy market. It means that any major complication on the energy market, that affects the prices or demand of crude oil, can have a great impact on the total revenues of the GCC member states. Considering the current global economic crisis, which has caused a decline in oil demand since mid 77 Dr. Mohamed Adbel Raouf: IRENA in Abu Dhabi: New Opportunities and Challenges (Gulf Monitor, August 2009, Vol. 3, No 2) 78 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) http://www.doksihu 36 2008, and the uncertain future caused by the crisis, this dependence on oil revenues means a realistic threat to the Gulf economies. However, this is not the first time when the GCC faces a similar threat - after the oil price shock in 1979-1980, oil prices took a downwards spiral for more than a decade. The first diversification strategies of

the Gulf Cooperation Council were born in the mid 1980s, but it is only the recent few years that some real development can be seen. It is important to see that there are notable differences between the GCC member states in terms of oil dependence. First of all, the countries with the biggest production in the group are Saudi Arabia, Kuwait, and the United Arab Emirates, while Bahrain and Qatar had a negative growth rate of oil revenues between 2002-2008, due to their decline of oil reserves and small producing capacity. The oil dependence rate is the highest in Qatar, Saudi Arabia and Kuwait (around 50% of the GDP), and lowest in Bahrain and in the UAE (less than 30%). Except from Saudi Arabia all the countries have experienced a non-oil growth rate in GDP exceeding the oil growth rate, in the case of Qatar and UAE the non-oil growth rate is as high as 13% and 11%.79 The drivers of this promising growth of non-oil activities in the Gulf Cooperation Council are built upon a few key

sectors: finance, tourism, commodities, manufacturing, and construction. To create a better investment environment, some of these sectors have gone through a liberalization process in most countries; in finance, education and tourism sectors private investments have been well encouraged. From country to country there have been major efforts to find out what they are best at, and to provide a growth environment and support for these sectors. Saudi Arabia has cut import duties, has privatized the telecommunication sector and liberalized the aviation industry. As a solution for attracting investments and fostering the development of productivity zones, it has embarked upon building so called "economic cities". These cities are designed to focus on a specific economic activity, and to serve as "centres of excellence" in their specific areas. The projects have started in 2009 and are expected to be complete within the next 10 years. A special investment 79 Michael

Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) http://www.doksihu 37 has been the King Abdullah University of Science and Technology, which aims to attract scientist and graduate students from all over the world. Besides this, Saudi Arabia is strong in infrastructure building and industrial projects, GDP growth in the next 5 years is expected to be boosted mainly by these areas.80 The Kuwaiti model is focusing on privatization process and deregulation of the economy. The privatization process is happening through two phases, first opening up opportunities for Kuwaiti nationals, and then for foreign companies. Taxes for foreign companies were significantly cut, from 55% to 15% that is more attractive for foreign investments. Large residential and tourism projects have been running in Kuwait, including the development of a deep sea port on the island of Bubiyan. Kuwait has a well developed and regulated bank sector also, and there are further plans to expand towards

financial services.81 Bahrain was the first to establish itself as a financial hub for the region, and for the Arab World by broader means, after Lebanon lost this position in the 1970s due to its political instability. Its recent mega-project has been the Bahrain Financial Harbour, which is an integrated, environmental friendly "finance city", planned to serve as a financial services centre for local, regional and international business communities. Bahrain is also putting great efforts in tourism development, focusing on regional tourism on the first hand, and there have been major projects for developing transport and related services to support tourism as a whole. The country is also known for a significant volume of aluminium production.82 The United Arab Emirates, launching its Dubai International Financial Centre, is used as an international banking hub for foreign banks to access other GCC countries. There has been major development in the tourism sector: as a result

of mega construction campaigns, Dubai now has the tallest tower in the world, the largest shopping centre, and a set of special artificial islands. Abu Dhabi has bought the name of the Louvre Museum and Guggenheim Museum, expecting to boost tourism with cultural 80 Ibrahim Saif (2009) Deloitte M.E: GCC powers of construction GCC factsheet (2009) 82 Ibrahim Saif (2009) 81 http://www.doksihu 38 attractions.83 Some certainly interesting innovations are the Dubai Internet City that provides a tax-free a hub for ICT related businesses over the Middle East, Africa and Asia; and the Dubai Media City that describes itself as a global platform for media related businesses.84 The UAE is also taking the leading role in turning the Gulf region into a trading hub, building the needed infrastructure has been a major focus of investments. Qatars main focus has been the liquefied natural gas (LNG) program, which has been one of the key drivers of Qatars over above GDP growth in the recent years

(in 2006 GDP growth was 9.9%, and according to forecasts they can expect 199% by 2010) In certain sectors, such as agriculture, industry, education, tourism, health, and natural resources, the government permits 100% foreign ownership of companies, that is an opportunity to increase private sector involvement in the economic production. Qatar is one of the many countries that focus on the finance sector, setting up the Qatar Financial Centre. There has been a major focus on attracting top universities to open their branches in Qatar, to host students from around the region.85 Oman seems to have the most challenges in regards to diversifying its economy, given that it is known as one of the more conservative and traditional GCC states. Its biggest opportunities are tourism and the construction sector. Oman is rich in historical sites that can attract a large number of tourists, and they offer a wide range of holiday activities, mainly focusing on nature, extreme sports and outdoor

activities. As for construction, Oman is also focusing on infrastructure development as a main priority.86 A special tool of diversification that is commonly growing around the region is the Islamic Finance (IF). It is not only a tool: it expresses and implements the need for aligning the financial sector with the Islamic law, the sharia. According to the sharia, it is prohibited to collect and pay interest; to trade at a financial risk (this is considered as a form of gambling); or to invest in businesses that are considered haram (like producing or selling alcohol, pork, or un-Islamic media). As these points challenge the 83 Ibrahim Saif (2009) Max Rodenbeck: Time travellers, The Economist (2002) http://www.economistcom/surveys/displaystorycfm?story id=E1 TDPQDTQ (downloaded on 03.112009) 85 Deloitte M.E: GCC powers of construction GCC factsheet (2009) 86 Deloitte M.E: GCC powers of construction GCC factsheet (2009) 84 http://www.doksihu 39 classic financial system to a great

extent, Muslim countries created their own solution for running financial services. They replaced interest with the so called profit- and loss sharing arrangements, and they developed an integrated platform for financing trade projects. Currently IF contributes with less than 1% to the global financial market assets, but it is considered as one of the fastest growing sectors in the global financial services industry.87 The GCC countries have been a centre of innovation and development for expanding the portfolio of IF, and they use Islamic Finance as a key diversification strategy - the Gulf region is home for the largest IF assets in the world and the three most important banks concerning Islamic Finance are also located in the Gulf. Along with its expansion, some major international banks, namely HSBC, Deutsche Bank, and Citibank have also implemented Islamic Finance in their portfolio.88 Another unusual economic diversification strategy has also gathered ground among GCC countries.

Food security is not a new issue for the Gulf countries, given the fact that the area these countries are located in is not suitable for advanced agricultural activities, and cannot provide the needed volume of agricultural products for the growing population. Since a few years some of the GCC countries have invested in agricultural production abroad, mainly in some other countries of the MENA region, such as Egypt and Sudan. More recently, Qatar and the UAE are considering buying underdeveloped farmlands in these countries, while Saudi Arabia and Kuwait are planning to buy farms and fisheries in South Asia.89 It can be seen, that one of the potential challenges around the diversification strategies in the Gulf region is that there in each of the key sectors more GCC countries strive for a regional or global position. A good example for this is the financial sector, whereas four countries are competing. Most countries offer the same or similar opportunities, and this creates a

situation when the majority of demand can only be expected from abroad. Another question is the interdependence between the oil sector and non-oil sector. As most of the projects are initially financed by governmental revenues, there is an interactive relationship between the two sides, and there is a risk that, in case oil 87 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) Dr. Samir Ranjan Pradhan: Islamic Finance in the GCC: Trends, Prospects and Challenges (2009) 89 Ibrahim Saif (2009) 88 http://www.doksihu 40 revenues drop for any reason, that sets back the non-oil sectors development. The third main challenge that can hinder the diversification process is the question of geopolitical tensions and instability. As many of the GCC diversification strategies build on the presence of foreign clients, an evolving conflict in the region would raise a threat that foreigners withdraw their presence from the Gulf. 4.5 A special issue: Arab Sovereign Wealth Funds

―Sovereign Wealth Funds are special-purpose investment funds or arrangements that are owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets.‖90 Recently, Sovereign Wealth Funds (SWF) of emerging economies, in particular China, Russia and some Middle East countries including the GCC member states, have grown into significant players as investors in the global financial market. Their presence and their projected growth have provoked a heated debate around their impact on the global financial systems, due to their nature and their objectives. Even though the debate started in the past few years, SWFs are not a new phenomenon; the first SWF was created in 1953 in Kuwait. However, SWFs had not really been noticed until 2007, when it became obvious that the size of SWF assets were

surprisingly huge on a global scale. This sudden growth was a result of the increase in revenues in the oil producing countries in the Middle East; as well as of the increase in export revenues of China which caused a favourable balance of trade for the country.91 SWF managers today create and manage increasingly complex international portfolios. Some of them, especially from Arab countries, are becoming strategic investors: they can arrange investments in a way that it contributes to diversifying national economies and make them more competitive. They also focus on building new alliances and 90 International Working Group of Sovereign Wealth Funds: Sovereign Wealth Funds, Generally Accepted Principles and Practices, ―Santiago Principles‖ (2008) 91 Alan Macpherson, Neil Coles, C.J Getz, Pippa Booth, Simon Cowan: Minding the GAPP (Deloitte Touche LLP, 2008) http://www.doksihu 41 partnerships that would benefit their national economic development objectives.92 It is clear then,

that the purpose of these investments is to contribute to the management of public finances in their home countries, and achieve macro economical stability. The main concerns, that recipient countries raised, were about the threats that Sovereign Wealth Funds might pose to their economic, corporate and political interests. Some worried that SWFs would move on to support their home countries political agenda, thus risking their national security. Debates arose about the need to protect key domestic sectors from foreign investments. Recipient countries also saw SWFs increasing their market risk and volatility. On the other hand, it is agreed that SWFs are major contributors to global growth and to stabilizing the global financial system. In the time when the global financial crisis started to accelerate, SWFs injected a moderate amount of capital in European and US based financial institutions.93 For the request of the G-8 group in October 2007, IMF supported the formation of an

International Working Group of Sovereign Wealth Funds (IWG) with the purpose of setting up generally accepted principles and practices (GAPP) that set a global framework for managing SWFs, ensuring appropriate governance and accountability. The members of the IWG are the representatives of twenty-six SWFs, and permanent observers from other concerned sides. The GAPP, also known as the Santiago Principles was finalized in 2008. It provides a set of principles; a legal framework; an institutional framework and governance structure; and an investment and risk management framework. Implementation of the GAPP is voluntary For facilitating the implementation process an OECD investment code was adopted on behalf of the recipient countries, and in the spring of 2009 the International Forum of Sovereign Wealth Funds was launched by the so called Kuwaiti Declaration.94 The importance of all this in regards to the Gulf Cooperation Council is that the Gulf states are home for some of the biggest

SWFs in the world, such as the Abu Dhabi Investment Authority (which is the largest global SWF), the Saudi Arabian Monetary 92 Sven Behrendt: Gulf Arab SWFs – Managing Wealth in Turbulent Times (Carnegie Policy Outlook, 2009) http://www.carnegieendowmentorg/publications/indexcfm?fa=view&id=23044 (downloaded on 05.112009) 93 Alan Macpherson, Neil Coles, C.J Getz, Pippa Booth, Simon Cowan: Minding the GAPP (2008) 94 IWG: Santiago Principles (2008) http://www.doksihu 42 Agency, and the Kuwait Investment Authority, amongst others. According to the IHS Global Insight the annual growth of SWFs has been 24% in the past five years, and the Gulf States have had a big stake in this growth.95 This provides them with a thriving role in the global economy, with opportunities to partner with other emerging economies, and to transform the global financial market. 4.6 The socio-economic situation of the GCC ―Since 1970 their governments have spent a combined total of $2 trillion to treble

literacy levels to 75%, add 20 years to average life expectancy and create a world-class infrastructure.‖96 Certainly, social development has been one of the major achievements of the Gulf Cooperation Council member states in the past decades. They have put a lot of effort in improving living conditions for all, by improving the infrastructure such like access water and electricity, and also by providing the needed social infrastructure: increased access to education, health care, social security. Since the 1970s, the national population has doubled, and the Gulf population is currently the fastest growing on Earth (growing three times as fast as the global average)97 - which is a clear sign of an improvingly stable and safe social system. However, the Gulf States are not coming from an easy situation. As mentioned before, they face a very unique population structure. During the 1970s when they experienced their first real economic boom due to high oil prices, the wealth attracted

many immigrants, mainly from countries like Pakistan, India, Bangladesh, Indonesia and the Philippines. As at that point of time the national labour force was insufficient to take up all the extra work that was created by the economic growth, the South Asian expatriate labour force was welcome to contribute, especially when it came to lower prestige or physical work. Meanwhile, expatriates from Western countries took high skilled jobs in the private sector, and nationals provided the labour force for the public sector. 95 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) Max Rodenbeck (2002) 97 Max Rodenbeck (2002) 96 http://www.doksihu 43 The dependence on expatriate labour force has remained relatively high ever since, on GCC average expatriates count up to 56% of the total labour force, and more than 30% of the total population. The highest rates can be found in Qatar and in the United Arab Emirates, where more than 80% of the population consists of

expatriates.98 To balance the situation, GCC countries each started a "nationalization" process: they provide extra support and quotas for nationals, and introduced stricter work permit regulations for foreigners. It is also important to see that citizenship and naturalization of foreigners is a slow and difficult process, and only a very small percentage of expatriates actually become GCC citizens.99 These regulations and the nationalization process put the expatriates in a very uneasy situation, the Human Right Watch World Report (2007) talks about abuses against migrant workers, such as non-payment of wages and withholding passports and travel documents, amongst other.100 Recently, by 2008, all GCC countries finally decided to liberalize the system for expatriates, which removed quite a number of limitations from expat workers. An interesting issue is the impact of the Gulf economies on the home countries of the expatriates, especially the ones in Asia. As one of the most

common models by the expatriate workers is that one or more male members of the family leaves the home country to look for a better life, and leaves the rest of the family behind; these people transfer a high percentage of their wages back to their families. Thus, for some of the countries it means a drop in their economies, if the Gulf States face a high level of inflation, or have to cut salaries due to economic hardship.101 At the same time, as the national population is rapidly growing, the Gulf States have to face a relatively new phenomenon: they have a growing young and educated population that needs to be offered jobs. The labour force of GCC national have been directed to the public sector is the past decades, and GCC nationals are likely to refuse to accept lower paid jobs or jobs that require less professional skills. However, the public sector is becoming overwhelmed and soon it will not be able to absorb much more workforce. 98 Michael Sturm, Jan Strasky, Petra Adolf,

Dominik Peschel (2008) Khaled Batarfi: Gulf Countries Face Closer Regional Cooperation (2007) http://www.arabviewcom/articlesasp?article=771 (downloaded on 06112009) 100 Ibrahim Saif (2009) 101 MENAFN Press: Global: GCC market review – September 2009 (2009) 99 http://www.doksihu 44 Meanwhile, even though a high percentage of this young population is educated, there is a mismatch between the curricula they take and the needs of the labour market. As a consequence, there is a growing unemployment rate in the Gulf Cooperation Council, which tops at 10-15% in some of the countries (with the exception of Qatar and the United Arab Emirates which have the lowest unemployment rate at 2-3%), and 25% of the unemployed are 20-29 years old.102 102 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) http://www.doksihu 45 5. Foreign policies and foreign relations of the GCC states 5.1 Foreign policies of the GCC There are some unique factors are that determine the foreign

policy setting in the Gulf Cooperation Council, both as a group and as individual countries. These factors, coming from internal or external settings, fundamentally describe the situation of the GCC states, and have a direct or indirect impact on their foreign policies and strategies. The first on the list shall be the linkage in their histories, and the way they identify themselves: they belong to the Arab community and their primary religion is Islam. Their states are traditionally led by monarchies, which they have integrated with democratic governance setting and institutions. The geographical setting of the GCC countries and the Persian Gulf itself has been a consideration of foreign affairs and economic strategies since centuries, due to their central location between Africa, the Middle East and Asia, and their accessibility via waterways and overland routes. Besides that the region is rich in natural resources such as crude oil and gas reserves, which, in the past century, have

been increasingly effecting the Gulf States growth and decision making policies. The thriving wealth of these countries also needs to be regarded, especially when it comes to the use of their assets and re-investing it for various purposes. Last but not least, as the composition of population is special by the fact that a high percentage of the population consists of immigrants, it creates a direct or indirect link to the home countries of expatriates.103 There is one more important consideration to highlight. As the Gulf Cooperation Council strives to participate in international and regional affairs as one single, unified group; its member states have integrated their foreign policies, and in different matters they try to achieve a common stand. For this, they have created a platform in which their foreign ministries can consult and coordinate foreign policy setting. The GCC applies a framework of foreign relation principles “based on mutual respect, nonintervention in internal

affairs and the pursuit of common interests, in such a manner that maintains the common interests of the GCC Member States are secured, their 103 Peter Hellyer: The Evolution of UAE Foreign Policy (in “United Arab Emirates: A new Perspective”, edited by Ibrahim Al Abed and Peter Hellyer, Trident Press Ldt., UK, 2001, pp161-178) http://www.doksihu 46 stability enhanced, and the approval of their peoples gained.‖104 However, the Cooperation Council Charter does not imply any limitation on the member states sovereignty in most aspects of foreign policy, which, at times, creates a complicated situation in regards to reaching consensus within the group. When analysing foreign policies, the basic questions to be answered are the following: What is their interest? What do they stand for? How do they make decisions? The answers to these questions will give clarity about how GCC handles their international relations in general, and will highlight some important aspects of their

foreign affair strategies. Also, they provide with guidance when it gets to relations with certain countries or country groups, pointing out core issues like why they seek for tight relations with one and why not with the other, and how they react on others activities. 5.11 What is their interest? The Gulf Cooperation Council member states, regarding both political and economic interest, seek for security and stability in all aspects. This means to them a peaceful and stable immediate regional setting; securing themselves for the event of conflicts; and a stable, long-term growth environment for their economies.105 As far as the regional security is concerned, getting back to the history and current realities of the Persian Gulf, it is easy to see that a long-term peace is yet to be reached. The questions of extremist movements in Iran, US occupation of Iraq, a recent revolution in Yemen, and ongoing territorial disputes between the neighbouring countries; all impose uncertainty,

distrust and risks on the GCC states. Therefore member states suggest building closer ties within the Gulf Cooperation Council in order to be able to answer these issues together; and they facilitate the process leading to peace and stability in the region, using both diplomatic tools and development aid. On the other hand, once diplomacy does not succeed, a proper defence system is needed. Historical experiences underline this need: the British provided a treaty relationship for some of the Gulf States for several decades, promising defence of their 104 105 GCC-SG: Areas of Cooperation Achievements, Political Affairs GCC-SG: Areas of Cooperation Achievements, Political Affairs http://www.doksihu 47 territories in case of disturbance or conflict, but when the British left the region in the 1960s, it took long for all the six countries to build up their own defence system. In the outbreak of the Iran-Iraq war, and the Iraqi offensive of Kuwait, GCC states had to face the situation

that their own defence system was weak and unable to really protect them. Ever since, GCC countries seek for deepening ties with countries in regards to defence agreements, as well as to arms sales - today Saudi Arabia and the United Arab Emirates are listed amongst the 10 countries in the world with the highest volume of military expenditures.106 The third most important aspect is that the GCC foreign policies shall reflect on their overall economic interest. This means, as mentioned above, a long-term oriented environment in which their economies can steadily grow. The GCC acts as a single group when it comes to international trade relations, and they promote long-term agreements and strong relations with their partners. On the same note, they prefer longterm contracts and projects with a wider range of cooperation agreements when it comes to oil exports. Gulf States look for safe destinations for their investments, and they take a long-term view on their investment strategies.107

5.12 What do they stand for? As it can be clearly drawn from previous sections, looking out from the Gulf region, and from the GCC states own interest, we can observe that Gulf States are members of two greater communities. One of these communities is the Arab World, as it is commonly called, which means the totality of Arabic speaking countries, around the Middle East and North Africa (MENA).108 The priorities of GCC in regards to the Arab issue are: resolving the Arab-Israeli conflict; providing collective action and support for causes such as the Arab peace process and Arab unity; representing the Arab interest internationally and preserving Arab rights; and contributing to the modernization and 106 Najat Samil Ali: Az arab országok a 21. század küszöbén (2000) (in “Ars Boni et Aequi Tanulmányok az ezredvég nemzetközi rendszeréről Bokorné Szegő Hanna 75. Születésnapjára” Budapest University of Economic Sciences and Public Administration, edited by Rostoványi

Zsolt, Budapest), pp.489-500 107 GCC-SG: Areas of Cooperation Achievements, Political Affairs 108 It is important to see that not all MENA countries are considered as Arabic countries. http://www.doksihu 48 development of the Arab World.109 All GCC member states are members of the Arab League. The other, even more expanded community that GCC countries belong to is the Islamic community. Saudi Arabia is considered as the birth place of Islam, and the two most holy Holy Places of Islam, Mecca and Medina are also located there. The history, cultural heritage, and identity creates a strong link between Islamic countries, and the Gulf Cooperation Council finds it important to play a leading role in supporting and enhancing Islamic issues. GCC states aim to defend Islamic issues at the international level through dialogues; and to disassociate Islam from terrorism in the minds of people globally. They are members of various Islamic international organizations, such as the Organization of

Islamic Conference (OIC), and the Muslim World League.110 Besides that, the Gulf Cooperation Council supports the activities, and actively works with international organizations, like the UN and the World Bank Group, among many others. Gulf States are involved in global policy making in different areas like trade, investments, and global imbalances, and are active in exchanging knowledge and experience on a range of different issues with other countries and regions. They often provide development assistance and emergency relief aid for the international community both on a state-to-state level and through international donor programmes of international organizations and agencies (UN Agencies, International Committee of the Red Cross, etc.)111 Furthermore, Gulf States work closely together with some major international development programmes such as the Arab Framework by UNICEF for education development, and the Arab World Initiative by the World Bank Group. 5.13 How do they make

decisions? ―To jaw-jaw is always better than to war-war.‖112 (Sir Winston Churchill, 1954) 109 GCC-SG: Areas of Cooperation Achievements, Political Affairs Abdulla Baabood: Dynamics and Determinants of the GCC States’ Foreign Policy, with Special Reference on the EU in “Analysing the Middle East Foreign Policy and the Relationship with Europe”, edited by Gerd Nonneman, Routledge, USA, 2005, pp.145-168 111 Peter Hellyer: The Evolution of UAE Foreign Policy (2001) 112 Peter Hellyer: The Evolution of UAE Foreign Policy (2001) p.164 110 http://www.doksihu 49 The quotation above is fully adopted by the Gulf Cooperation Council as a genuine and basic foreign policy. It promotes peaceful resolutions and conciliation through facilitation cooperation and consensus, and whenever possible, seeks to avoid or defuse confrontation and conflict. A good example on this policy is the invitation of Irans President to attend a GCC annual summit in December 2007. ―What we care for in the

GCC is finding solutions that enhance security and stability . and believe in dialogue as a way to solve the crisis,‖ said Abdulrahman al-Attiyah, the Secretary General of the GCC.113 A prevalent foreign practice of the Gulf states to remain neutral, and in case of confrontation, pick sides only after much internal and external consultation. They avoid, ―if possible, friendships that are too close and enemies that are too intense.‖114 They tend to respect and rely upon international law and international legal norms. GCC countries prefer to avoid rushed or impulsive decisions and when they perceive inaction or silence being their best interest, they prefer to adopt that approach. By the same token, they apply a policy of non-intervention in other countries affairs.115 The Gulf Cooperation Council considers tolerance an important value, and encourages tolerance towards different approaches, cultures, religions, as long as they do not mean a threat for the member states or their

people. However, extremism, in particular of religious origin, is unacceptable for the Gulf States.116 5.2 Foreign relations with other countries and regions To understand how the Gulf Cooperation Council applies its foreign policies, how it manoeuvres with its relationships and what role it takes in the global politics, it is needed that we analyse its relationship with some of the countries and country groups or regions that have major impact on GCC economic and political issues. 113 AFP: Gulf countries speak against military option in Iran (2007) http://afp.googlecom/article/ALeqM5hcmBdhr4KBTeMQ6ib4Z3FPXWqhHA (downloaded on 09.112009) 114 Abdulla Baabood: Dynamics and Determinants of the GCC States’ Foreign Policy, with Special Reference on the EU (2005), p. 159 115 Joseph A. Kechichian: Oman and the World: The Emergence of an Independent Foreign Policy (RAND, USA, 1995) 116 GCC-SG: Areas of Cooperation Achievements, Political Affairs http://www.doksihu 50 5.21 Iraq Iraq is

one of the two countries situated in the Persian Gulf region that is not part of the Gulf Cooperation Council. However, it is member of the Arab League, as well as of OPEC, together with the GCC countries. The Gulf Cooperation Council was formed one year after the Iran-Iraq war started in 1980, and the GCC collectively took Iraqs side in the war after 1985, as a fellow Arab country, and also from the fear of the expansion of extremist religious views originated from Iran. However, when a decade after in 1990 Iraq decided to invade Kuwait, the GCC stood up for Kuwait, and supported its defence in both military and financial ways. After the liberation of Kuwait took place in 1991, the GCC urged the implementation of the relevant UN resolutions in order to ensure security and stability in the region. Since in 2003 a US and British coalition started the Second Gulf War against Iraq, the stand of the Gulf Cooperation Council is not unified in regards to the question of Iraq. The concerns

are various: the disapproval of a militant approach and Iraqs occupation by the US; the unclarified question if the reason behind the occupation was really the violation of the UN resolutions or whether it is about simple political power plays; however, a recent concern also arose, on the US plan to withdraw troops from Iraq, if this would lead to an increased risk of the spread of extremist Islamic movements in the whole region.117 The official statement on their case is that GCC opposes any military or violent operation, and they call Iraqi leadership to stand united to confront terrorism, aggression, and attempts to divide Iraq.118 The GCC member states, since 2004, have been supporting Iraq in restoring its integrity, sovereignty, and stability. They supported the legislative elections in the country in 2004; they provide development aid for the reconstruction; and support in the creation of economic and political reform packages and reconstruction plans.119 117 Kareem Mahjoub:

The Obama Administration: A Shift in Foreign Policy? (Gulf Monitor, March 2009, Vol. 3, No 1, pp20-23) 118 GCC-SG: Areas of Cooperation Achievements, Political Affairs 119 GCC-SG: Areas of Cooperation Achievements, Political Affairs http://www.doksihu 51 5.22 Iran Iran is the other Persian Gulf country which is not member of the GCC. Iran is member of OPEC, and is among the top ten crude oil producers and exporters globally. And even though Irans major religion is also Islam, its people are mostly Persian origin. This has been a source of conflict since the 7th century when Arabs took over most of the Gulf region, and Islam expanded to the remaining parts of the Persian Empire. ―Irans occupation of the three UAE islands since November 1971 has been a great source of concern that impeded the possible expansion of relations between the GCC States and Iran.‖120 Several territorial disputes have arisen between the Iran and the Arab countries of the Gulf, as Iran claims territories

on historical basis. The dispute between the UAE and Iran over the three islands has not been solved until today, and Iran has a claim over Bahrain as well, mentioning it as one of its own provinces.121 Another concern is that Iran is home for Islamic extremism: in the majorly Shiites populated Iran violent movements started under the name of Islamic fundamentalism. This poses a great fear on the GCC states which also have a Shiite majority (Bahrain) or a considerable Shiite minority (Kuwait, Oman, Saudi Arabia and the UAE). The extremist movements began to spread in 1979 with the Iranian Revolution led by Ayatollah Khomeini, who took over then as a Supreme Leader until his death in 1989. The recently re-elected President Ahmadinejad, who has been on power since 2005, also holds controversial views, and that builds a burden in the GCC-Iran relations.122 In 1987 the GCC adopted a collective framework for handling the relations with Iran. It is ―based on the principle of good

neighbourliness, non-interference in internal affairs, peaceful settlement of disputes and the rejection of the policy of fait accompli.‖123 They hold bilateral contacts with Iran; however, the relationship between Iran and the individual GCC member states is very diverse. The UAE, in contrast with its above mentioned territorial issues, is the largest trading partner of Iran from the GCC states, 120 GCC-SG: Areas of Cooperation Achievements, Political Affairs Kareem Mahjoub: The Iranian Elections: Change or No Change? (Gulf Monitor, 2009 August, Vol. 3, No. 2, pp20-24) 122 Kareem Mahjoub: The Iranian Elections: Change or No Change? (2009) 123 GCC-SG: Areas of Cooperation Achievements, Political Affairs 121 http://www.doksihu 52 with a considerable trade surplus.124 Qatar has a cooperative attitude towards Iran, while the other countries are rather distrustful towards the country. As far as Irans nuclear activities are concerned, the Gulf Cooperation Council stays cautious. It

definitely rejects the possibility of a war against Iran, as well as the possibility that Iran would use its nuclear development program for mass destruction purposes. The GCC calls Iran to cooperate with the International Atomic Energy Agency and follow its standards.125 ―We want the military factor to be eliminated,‖ said Abdulrahman al-Attiyah126. Meanwhile, the international community believes that GCC can have a major role in ensuring the nuclear security of the region and in bringing Iran into negotiations.127 5.23 The greater Arab World and the Islamic World The Palestine-Israel conflict is of significant importance and it is one of the first priorities of the Gulf Cooperation Council in regards to regional politics. It is interesting to see that the reports about the situation are very different if we look into Western or Arabic sources. There is no agreement on whether it is Palestine abusing the rights of Israeli people and state, or it happens the other way around, but

it is clear that there is a lack of willingness to negotiate, and a compromise, for the time being, does not seem like an acceptable solution for any of the parties involved. The United States is the main support of Israel, while Palestine is being supported by the Arab countries, including the GCC states. It has been many years without real solution, and, in the framework of the Middle East peace process, the GCC states have been trying to facilitate some progress. The GCC statement in 2004, whereas King Abdullah of Saudi Arabia offers the acceptance of an independent and sovereign Israeli state, if Israel recognizes Palestine also as an independent and sovereign state and stops the abuse against the Palestinian nation, has been an important step in the peace progress, and even the US has begun to use the suggestion as a milestone for the further progress.128 124 Prof. Nader Habibi, Dr Eckart Woertz (2009) GCC-SG: Areas of Cooperation Achievements, Political Affairs 126 AFP: Gulf

countries speak against military option in Iran (2007) 127 AFP: Gulf countries speak against military option in Iran (2007) 128 Obama’s interview with Al Arabiya (2009) http://www.alarabiyanet/articles/2009/01/27/65096html (downloaded on 07.112009) 125 http://www.doksihu 53 The Gulf Cooperation Council has taken part in facilitating negotiations, creating diplomatic solutions, and in peace keeping operations in other countries in the MENA region as well, for example for Lebanon and Syria, when they had been in conflict with Israel. The GCC patronized the peace agreement between Chad and Sudan; also, it has participated in facilitating the peace progress in Darfur (Sudan). It has provided diplomatic support and peace keeping operations in Somalia.129 As far as modernizing the Arab World is concerned, the Gulf Cooperation Council had a large part in finalizing the Tunis Declaration of the Arab League Summit in 2004, in which the Arab states clearly determine their development plan

on areas such as human rights, economies, public institutions and work methods, politics, education, information technology, just to mention a few. The same year, the GCC created the Manama Declaration, which is drawing the implementation plan of the Tunis Declaration specialized for the GCC member states.130 The Gulf Cooperation Council takes all chances to defend Islamic issues at the international level, but that is not the only way they contribute to the Islamic community. In the case of the war in Afghanistan in the 1980s, the war in Yugoslavia in the 1990s, and the Chechen wars, they provided refuge and humanitarian help for Muslim women and children from the war areas. With the Muslim states of Central Asia, including Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan, Uzbekistan and Azerbaijan, the GCC states developed bilateral trade and investment relations.131 5.24 South and East Asia The oil demand market have shifted from the Atlantic region to Asia, and China, India, Japan,

South Korea, and the ASEAN countries are the biggest oil consumers as living standards and production increase. Asia is the predominant destination of GCC exports, nearly 60% of the Gulf export is absorbed in this continent. These exports mainly consist of oil and gas products, of course. Besides, on the other side, Asian import 129 GCC-SG: Areas of Cooperation Achievements, Political Affairs GCC-SG: Areas of Cooperation Achievements, Political Affairs 131 Peter Hellyer: The Evolution of UAE Foreign Policy (2001) 130 http://www.doksihu 54 counts up to 35% of the GCC total import, but this share is continuously growing.132 Since 2003 there have also been Free Trade Area negotiations between the GCC and certain Asian countries, however, most of the negotiations have been finalized yet. The key interest of the Gulf Cooperation Council in Asia lays in China, India, Pakistan and Japan, and recently, in the ASEAN member states.133 The relationship between GCC and China has been active

since 1990. Since then the Foreign Ministers of both China and the six GCC states meet once a year to conciliate international and regional affairs of mutual interest. Since 1996, the countries established a bilateral consultative mechanism, and hold consultations around political and economical issues yearly in either Riyadh or Beijing. 134 Chinas export share to GCC is above 20% now, which is exceeds the share of the US and is close to the share of the EU.135 The export structure from China is made of textile, mechanical and electrical products, light industrial products and food, while their import from the GCC consists of mainly oil and petrochemical products. Besides that, a labour services contract was signed by the two countries in 1979, to be renewed in 2001 - an agreement about contracting more than fifteen thousand Chinese workers in the Gulf countries.136 China has a growing interest in the GCC above all: there is an increased competition for oil investment projects in the

Gulf, and China offers long-term and large-scale contracts, including long-term export contracts. Links between the Gulf and the Indian subcontinent look back to thousands of years, there is evidence for extensive trade between the Gulf coast and the Harappa civilization of the Indus Valley from 5000 years ago. The trade relationship was maintained even after the discovery of oil in the Gulf, and India and Pakistan remained key trading partners of the Gulf States.137 Today, there is a growing interdependence between India and the GCC, on various fields. India, just like China, is one of the most important emerging markets of the global economy, thus it also needs the oil and gas supply the GCC can provide it with. On the other hand, India is investing in universities 132 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) GCC-SG: Areas of Cooperation Achievements, Economic Cooperation 134 Ministry of Foreign Affairs of the People’s Republic of China: The Cooperation

Council for the Arab States of the Gulf (GCC) (2000) http://www.fmprcgovcn/eng/wjb/zzjg/gjs/gjzzyhy/2616/t15334htm (downloaded on 09.112009) 135 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 136 Ministry of Foreign Affairs of the People’s Republic of China (2000) 137 Peter Hellyer: The Evolution of UAE Foreign Policy (2001) 133 http://www.doksihu 55 and knowledge centres being opened in the Gulf States. There is also an increasing competition between India and other Asian countries, especially China about investing in oil projects and harvesting from the oil windfall of the Gulf States.138 Between Japan and the Gulf Cooperation Council direct negotiations started in 1984. They have moved into an economic dialogue, and since 2006 rounds of negotiations have happened on the basis of launching a Free Trade Area between Japan and the GCC. Currently Japan is taking up 21% of the Gulf exports139 Export to Japan from the GCC is made up by crude oil, other petrochemical

products, and semi-finished aluminium. Japanese exports to the GCC were dominated by machinery and equipment The FTA agreement has not yet been signed between the GCC and Japan, however, trade between them is growing from year to year; in 2008 this growth was 43%.140 5.25 The United States of America The interest of the United States in the Persian Gulf can be traced back to the time of first oil discoveries: as there was a growing demand for fuel in the United States as early as in the beginning of the twentieth century, they were looking for ways to expand their fuelling capacities from the oil rich Gulf States. Ever since crude oil has been one of the major concerns of foreign relations between the US and the Gulf Cooperation Council, however, in the recent years some more common issues raised. The concern of the USA in the Gulf Cooperation Council today is based on multiple factors. The first factor, of course, remains the issue of energy supply that the Gulf can provide the US

with. After the 1973 Arab oil embargo the US learned that it worth for them to keep good relations with the Gulf States, otherwise it can look for different solutions to fuel its economy. An emerging competition is now worrying the United States, as China and India gather ground in the Gulf, taking over a notable number of oil projects and becoming reliable export partners of the GCC. This has already caused a loss of market share of the US in the Gulf.141 138 Dr. Samir Ranjan Pradhan: India, GCC, and the Global Energy Regime (2008) Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 140 Rachna Uppal: GCC trade with Japan up 43% (2009), http://gulfnews.com/business/economy/gcctrade-with-japan-up-43-1490371 (downloaded on 15112009) 141 Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 139 http://www.doksihu 56 The second reason why the US needs the Gulf lies in the growing financial power of the Gulf Cooperation Council. The GCC states have a large amount

of investments in dollar-denominated assets in US government treasury bills and bonds, which contributes to financing the large US deficit. The GCC countries drive a long-term investment strategy, using their SWFs as main tools, and these investments are also threatening for the United States, as the large shares of the Gulf in certain US companies might give Gulf investors a substantive management power in the companies.142 Lastly, the new foreign priorities of the United States, for the presidency of Barack Obama, also require contribution and cooperation from the Gulf Cooperation Council. These priorities include the responsible ending of the war with Iraq; keeping nuclear weapons out of the hands of terrorist (referring mainly to Irans nuclear development activities); and promoting peace and security in Israel and in the Middle East.143 Even though the Gulf States have been in alliance with the US since long decades, this relationship has never been totally smooth. The US

supporting Israel, going into to war against Iraq, and now an evolving conflict with Iran - these all give reasons for the GCC to criticize the United States. However, the Obama administration has declared a sharp change in their foreign policy, the results of that are yet to be seen. What the GCC would like to see is that the US reaches a significant progress in the Palestine-Israeli peace process; it supports the reconstruction of Iraq; it solves its conflict with Iran in a diplomatic, peaceful manner; and that it finally keeps its fingers away from intervening in the issues of the Middle East. Then the US is likely to experience a rather positive attitude and growing trade and investment relations with the Gulf States.144 5.26 The European Union Formal cooperation between the European Union and the Gulf Cooperation Council looks back as early as 1988, when they created the Cooperation Agreement, setting up an inter-regional cooperation between the two groups; disposing of

establishing a Free 142 Prof. Nader Habibi, Dr Eckart Woertz (2009) The White House: Foreign Policy, http://www.whitehousegov/issues/foreign-policy/ (downloaded on 15.112009) 144 Kareem Mahjoub: The Obama Administration: A Shift in Foreign Policy? (2009) 143 http://www.doksihu 57 Trade Area agreement between them; beginning a political dialogue; and setting up Joint Ministerial Councils. Ever since there are regular annual ministerial council meetings and other joint cooperation committees and expert meetings over different fields like environment, energy, education, combating money laundry and terrorist financing. In 1995 they defined three "baskets" of the EU-GCC cooperation: economic and trade relations; cultural and scientific cooperation; and political and security matters.145 The main trading partner of the Gulf Cooperation Council is still the European Union, providing 29% of the GCCs total imports. However, only less than 10% of the GCC export goes to the EU,

that is because the European Union is diversifying its crude oil supply by region, thus imports crude oil from different countries of the MENA region. The exports to the European Union from the Gulf consist of mineral fuels, lubricants and related materials mainly; while the import structure is made of machinery, transport equipments and manufactured goods, mainly. The Gulf is currently the EUs fifth largest export market.146 To enhance this relationship, there have been FTA negotiations between the two trade blocks since two decades now. The agreement is still not yet finalized, due to some major disagreements around export duties and human rights.147 As far as the cultural and scientific cooperation is concerned, there are a number of cooperation points also. According to the statement of the latest joint EU-GCC Council and Ministerial meeting they plan to cooperate on the field of environmental sustainability, in order to mitigate and adapt to climate change. They are willing to

exchange experiences on peaceful use of nuclear energy, as the Gulf Cooperation Council is interested in nuclear technology as a source of alternative energy. Besides that, the usage of other alternative, sustainable energy sources is also a common topic. Within the next few years the two groups also plan to launch a higher education exchange program, in which hundreds of students would be involved.148 145 Abdulla Baabood (2005) Michael Sturm, Jan Strasky, Petra Adolf, Dominik Peschel (2008) 147 Ghazanfar Ali Khan: Vision set out to bolster GCC-EU cooperation (2009) http://www.arabnewscom/?page=1&section=0&article=122124&d=3&m=5&y=2009 (downloaded on 13.112009) 148 GCC-SG: 19th GCC-EU Joint Council and Ministerial Meeting (Muscat, 29 April 2009) http://www.gcc-sgorg/eng/indexphp?action=Sec-Show&ID=299 (downloaded on 13 November 2009) 146 http://www.doksihu 58 Even though the GCC and the EU do not have a common ground about the understanding of democracy, in

most of the cases they take the same stand in regards to international political affairs. They call for a long-term resolution of the PalestineIsraeli war, and as a principle they encourage the two-state solution They welcome the improvement of human right situation in Iraq, and they provide diplomatic, technical and development support for the countrys reconstruction. The EU and the GCC both request Iran to stick its nuclear programme to peaceful reasons only, as well as that Iran withdraws its claim for the three islands of the United Arab Emirates and for Bahrain, in accordance with the international law. They also work closely against terrorism, especially in regards to financing terrorists.149 Most of the cooperation between the European Union and the Gulf Cooperation Council is implemented on a collective, group-to-group basis, but there is quite some bilateral relationship between the individual member countries also. For example, there are defence and security agreements

between France, the United Kingdom and some of the GCC member states; and some of the EU member countries are the major defence equipment providers for the Gulf States.150 5.27 Role of the Gulf Cooperation Council in global politics ―The role of those countries, the global economies underestimate, and in my view we should re-evaluate the share, the influence they have,‖ Strauss-Kahn, IMF Managing Director said. ―Not only on the global recovery this time, but the global economy in general.‖151 The Gulf Cooperation Council member states are now part of the main policy making bodies that they are concerned with, at the international level. They are inducement of OPEC, of the Arab League, of the International Working Group (for global policy making about Sovereign Wealth Funds), of the global imbalancement dialogues, and 149 Camilla Hall, Glen Carey: G20 undervalues the power of GCC says IMF chief (2009),

http://www.arabianbusinesscom/570797-g20-undervalues-the-power-of-the-gcc-says-imf-chief (downloaded on 15.112009) 150 Abdulla Baabood (2005) 151 Camilla Hall, Glen Carey (2009) http://www.doksihu 59 recently they have been invited to play a bigger role in the G-20 discussions and policy making.152 The international community expects the GCC to also contribute more to the recovery of the world economy, especially their immediate neighbours, from the damages caused by the global economic crisis.153 Besides policy making, the wealth that the GCC member states have gathered recently, make them an important player in the global economics. They have a great impact on the fellow Arabic countries, just by trading with them or by injecting foreign direct investments in their economies - shaking up hosting economies, creating new employment opportunities, and facilitating knowledge and technical transfer from the rich countries to the less advanced ones; these are the direct impacts of GCC

activities in the Arab World. Looking further out from the MENA region, the Gulf Cooperation Council is provides an important amount of fuel to different parts of the world, and is also a big import market for other countries and groups. 152 Camilla Hall, Glen Carey (2009) Dina El Naggar: Arab World Can Play Bigger Role in World Economy, Zoellick says (2009) http://web.worldbankorg/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22037622~ menuPK:247611~pagePK:2865106~piPK:2865128~theSitePK:256299,00.html (downloaded on 15.112009) 153 http://www.doksihu 60 6. The way forward 6.1 The possible future It is very difficult to forecast what would happen in the future, especially on the longview, but there are some almost certain suggestions based on current trends that can give us some guidance. Drawing the possible future helps us understanding current realities and trends better, and looking into the possible future of the Gulf Cooperation Council, will help us find the links between

reality and potential; but before that, there is a need to see how the world is projected to be in the near and far future. 6.11 Global outlook ―It is 2020 and the GCC has become a US$2trn economy, exporting nearly 25% of the world’s oil. Barack Obama has retired and the US has its 45th or even 46th president The world has become more multi-polar, with a number of Asian states included among the top global economies. The US remains the world’s largest consumer market at market exchange rates, but China has overtaken it in terms of purchasing power parity. The economic pain of the late 2000s is long overwe have been through another full business cyclebut the experience has shaped the attitudes of a generation of business people. The ―Washington consensus‖ of free-market economics gave way in the late 2000s to a renewed belief in the power of policy, but by 2020 this broad consensus has fragmented into a range of competing, conflicting models of political economy.‖154 The

question of the next years, until 2012, is an argued one, as it seems to be hard to predict the end of the global economic turmoil. However, most forecasts say that the global economic turmoil is over, and a slow recovery has started, that will bring back the pace of growth gradually during 2010 and 2011, ensuring the previously expected global growth for 2012-2013.155 154 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (Economic Intelligence Unit Limited, 2009) 155 IMF: World Economic Outlook 2009 (International Monetary Fund Publication Services, USA, 2009) http://www.doksihu 61 Beyond the recession, there are some trends that more certain. Researchers assume the average global growth to some 3% annually for the next 10-15 years, which will be exceeded by some of the emerging countries and regions, such as China, India, Russia, the ASEAN countries, and, most likely, by the Gulf Cooperation Council. It is clear, that the global growth

will be driven by Asia on the first place. 156 Another important assumption is that the economic growth, especially in the above mentioned regions will be the cause of a growing energy demand, including an increasing demand for oil. However, by 2020 the share of oil in the fuel mixture is expected to decrease to 30%, due to the steady increase of coal, gas, and renewable energy sources globally. 157 The issues of climate change, and mitigating its effects, is a burning one for the next years, along with the question of long-term sustainability on the levels of environment, economy, and society.158 The UN Millennium Development Goals are due by 2015, with a first priority being poverty eradication, which surely will be a major focus of the international community till then. World population by 2020 is expected to cross the 7-billion thresholds, and 95% of the population growth is expected to be in the developing countries, while Western countries are likely to experience declining birth

rates and aging due to a longer and wealthier life. A possibility of work force from the East migrating to the West in higher volumes than now is very likely. Besides the East-to-West migration, a general crossborder migration is expected to happen to a large extent, due to decreasing legal and physical barriers. With the growing global population, food and water shortage and allocation will be challenges to solve - not only in less developed areas. Urbanization process is projected to continue, a large population will live in mega-cities by 2020.159 In terms of global politics, the question of future is less predictable. Regional and subregional integrations are expected to deepen, developing strong political blocks for the chess-board of world politics. Even though the United States seems to remain a major force in global politics and economy by 2020, other countries, especially emerging economies are likely to take central roles as well, creating a multi-polar world.160 The 156

OPEC: World Oil Outlook 2009 (OPEC Secretariat 2009) International Energy Agency: Key World Energy Statistics 2009 158 International Energy Agency: World Energy Outlook 2009 (OECD/IEA 2009) 159 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) 160 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) 157 http://www.doksihu 62 future of the current hot spots is very uncertain, there are various scenarios built around prospects of the peace process of the Middle East and other regions. Along with the technical development that is most possible to continue at its current pace, a new generation of criminals might threaten the global security, building upon new technologies. 6.12 The Gulf Cooperation Council in 2020 ―We aspire to shift from an economy built on oil wealth to a productive, globally competitive economy, shaped by the government and driven by a pioneering private sector – an economy

that raises a broad middle class of Bahrainis who enjoy good living standards through increased productivity and high-wage jobs. Our society and government will embrace the principles of sustainability, competitiveness and fairness to ensure that every Bahraini has the means to live a secure and fulfilling life and reach their full potential.‖161 This is the long-term vision of Bahrain, but, as a matter of fact, it could be that of any of the other member states of the Gulf Cooperation Council - their long-term goals are accorded. It is rational: gives answers to the current challenges, and builds on initiatives that already have been started. The question is: to what extent will it be realized? What are the opportunities and threats along the way? What answers will the states of the Gulf Cooperation Council give to the external environment, to the global trends? 6.121 Economy As it was mentioned above, global growth will be driven mainly by the emerging economies, thus amongst all

others, by the Gulf Cooperation Council. Exceeding the average annual global growth, the GCC is one of the fastest growing regions in the world, with a projected 4.5% annual growth between 2009 and 2012 However, this 161 Regional Pioneer to Global Contender - The Economic Vision 2030 for Bahrain, http://www.bahrainedbcom/uploadedFiles/BahrainEDB/Media Center/Economic%20Vision%202030% 20(English).pdf (downloaded on 17112009) http://www.doksihu 63 growth will be considerably less in 2009 and 2010 due to the global recession - in 2009 2.5%, in 2010 somewhat above 3%162 This pace can be driven by several factors at once. First of all, the key geographical location of the Gulf Cooperation Council remains to be for its benefit. Trade links to Asia, to Africa, and the diplomatic relations that have already been built up will enable the GCC to play a key role in connecting continents and serve as a trading hub. In addition, maintaining an active and good relationship with the emerging

economies of Asia will provide an opportunity for the Gulf Cooperation Council to create stable export markets for its products, and to gather reliable investment partners. Asian and African countries are also able to provide the Gulf with food supply: in case the Gulf States farmland buying intentions succeed, that can create a level of food security. However, as it seem, imports will remain the main source of food, and spending on food will still notable grow, mainly due to high agricultural production costs. According to some forecasts we can expect oil prices to stabilize around $ 50-60 per barrel, which would mean a stable and satisfactory revenue source for GCC governments to invest in other sectors of their economies and finance their megaprojects.163 All countries are determined to increase the share of non-oil revenues in their GDPs: with well defined key areas, being industrial development and education, there is a high chance that the GCCs non-oil GDP will catch up well on

the long-run. Besides that, huge amounts are planned to be invested in real estate, infrastructure and human resource development projects in all Gulf States. Greater focus on manufacturing would be needed, in order to provide more employment opportunities in the Gulf States, and create more value-added industrial products for export.164 Liberalization, lower tax rates and favourable tax regulations are in the plans of the Gulf States in order to attract foreign direct investments (FDI). The countries of the Gulf Cooperation Council show a rapid development in the World Bank Groups yearly comparative assessment on doing business in different countries of the world. FDI is likely to be concentrated in the export-oriented industries, and in services, with special 162 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) 164 Michael Sturm, Jan Strasky,

Petra Adolf, Dominik Peschel (2008) 163 http://www.doksihu 64 regards on the finance sector. In the following some years there is a possibility that the volume of private investments will increase in many other key sectors as well: physical infrastructure building; social services such as health, and education; public transportation; and real estates. Many of these investments, though, will likely be based on public-private partnerships rather than only private investments.165 The total amount of the GCC outward investments is now estimated to be around $ 3 trillion altogether, which is approximately 1.5 more than Chinas total amount of reserves. Approximately one-third of this is held in US treasuries, in fixed-income assets, and the other roughly two-thirds are managed by Sovereign Wealth Funds. In the next years these investments are expected to further increase, however, the level of increase depends on a variety of factors, such like oil prices, oil demand, and trade

activities, amongst many others. According to projections, the destination of most of the investments will still be the United States and Europe, though, there is a possibility that a growing investment tendency will appear towards India and China. Due to international and domestic pressure, SWFs will have to become more transparent in their activities, that will somewhat moderate the concerns about them in some Western countries. Also, there is a tendency that SWFs will increase investments in the Middle East, in order to contribute regional financial balance.166 Finance seems to be a priority sector for the future. Most countries of the Gulf Cooperation Council are determined to turn the sub-region into an international financial hub. By 2020 it is likely that the Gulf will be the regional financial hub for Middle East and North Africa, however, it would be really ambitious to compete with other world-class financial centres such as London for example, just by the matter of

expatriate regulations and long-term perspectives for a permanent life there - the current regulations in the Gulf are far less attractive than in many other countries. As far as Islamic Finance is concerned, by 2012 only, GCC states are expected to double their IF assets. Islamic Finance will grow in a much greater pace than conventional finance, and 165 Deloitte M.E: GCC powers of construction GCC factsheet (2009) Steve Weisman, Mohsin S. Khan: The Gulf Cooperation Council: A New Global Force? (Peterson Institute for International Economics, 2009), http://www.iiecom/publications/papers/pp20090422khanpdf (downloaded on 17112009) 166 http://www.doksihu 65 as Gulf States are home for the largest IF assets, they can easily become the international centre for Islamic Finance.167 A major concern for the economic development is the matter of uncertain oil prices. If the price levels go below $ 50 per barrel for a longer period of time, that would build barriers in supporting the

development of the non-oil sectors, it would create delays in large investment projects, both inward and outward, and would also lower the export capacity and revenues of the Gulf States. Another threat lies in the process of easing regulations for both expatriate workers and foreign companies to do business and get employment within the Gulf Cooperation Council - in case the governments lag behind with the process, it can cause serious harms on the economy, by decreasing the capacity of the private sector. 6.122 Demography As mentioned in an earlier chapter, the Gulf Cooperation Council has one of the fastest growing populations on earth. Since the 1970s the population has doubled, and by 2020 a further 30% growth is expected. The population boom is majorly coming from the wealth being built up gradually since the 1970s, thus the majority of the citizens is under 25 years of age, and more than 20% is under 15 (this is already true, and the tendency is likely to remain). Due to

increasing access to education, international media and new technologies, there is a probability that a social shift will happen in the GCC societies, especially in the degree of knowledge and attitudes.168 GCC states will probably remain dependent on expatriate labour force even after 2020; however, growth in the expatriate population will be considerably slower than in the national population. Due to the planned education development projects and social reforms, hopefully the gap of skills and costs will be smaller between the national and expatriate labour force, but it is unlikely that it will totally diminish by 2020. This will make private sector still be dependent on foreign labour, thus migration to the Gulf region will remain relatively strong. The issue of managing the balance between 167 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) Economic Intelligence Unit: The GCC in 2020: The Gulf and its People (Economic Intelligence

Unit Limited, 2009) 168 http://www.doksihu 66 nationalization process and the expatriate communities in the GCC states will probably remain unsolved by 2020, due to the many factors that need to be considered in policy making. However, it is important that the issue of treating expatriates according to human rights standards should be solved within a short time. 169 The robust population growth will have various effects on the economy. It will ensure a strong market demand on the domestic markets, especially in terms of food and other consumer goods, which will increase import demand but will also attract investors’ attention. On the other hand, growing population requires a developed infrastructure, especially water and energy supply, and transport routes; housing; and public services. Education will have to be a focus area, especially if we consider the young population. Education will have to focus on finding the right match between the supply and demand sides of the

employment market, and will have to deal with setting different attitudes than in the past generations. 6.123 Energy There are two key issues that will determine the energy market over the following 1015 years. The first one is the matter of growing energy demand on a global scale It will mean an average 2.5% growth annually between 2010 and 2015, and 15% per year between 2015 and 2030. As said before, mainly China, India and other emerging economies will drive this growth primarily. Within the energy mixture, oil demand is expected to increase by 1% every year. Many OECD countries will run out, or become very short of their own domestic oil sources, so even though their oil demand is likely to decrease, they will be more dependent on imports from other regions, while the sources of other fossil fuels are also concentrated in a few countries only. This all creates a scene where stable energy supply might become a worry for many countries.170 There is an opportunity lying in the

situation for the Gulf Cooperation Council. Its member states are rich in either gas, or oil, or both, and they are still able to increase their exploiting and producing capacities. Thus investing in oil and gas projects will be 169 170 Economic Intelligence Unit: The GCC in 2020: The Gulf and its People (2009) World Energy Outlook 2009 http://www.doksihu 67 for the benefit of the international community. There is already a rising competition between the United States, some EU countries, China, and India for getting these projects. Most of the worlds oil supply will probably come from OPEC countries (51%), however, half of this will be concentrated in the Gulf Cooperation Council, with around 25%.171 On the side of natural gas production, Qatar is the only one in the global frontline from the Gulf region, though, the potential exploring and exploiting natural gas fields is not fully used yet in the other countries. The other energy related concern globally will be the question of

sustainability. Current global trends on energy consumption and supply are not sustainable, both from economic and environmental perspectives. The effects of global climate change have to be reduced or mitigated, especially by using more environmental friendly fuel types; and better energy efficiency is needed in order to sustain resources on a longer basis. 172 The Gulf Cooperation Council, as a major energy supplier region, also has to contribute to the solutions; indeed, they are expected to show an example. The importance of gas is expected to increase, especially by the fact that liquid natural gas (LNG) is a far more environmental friendly fuel type than crude oil, and as we know, some of the Gulf countries have major opportunities in that. On the other hand, in the Gulf States also large investments into developing alternative energy sources are expected. Their major interest lies in renewable energy sources and nuclear power.173 6.124 Governance and politics "Bahrainis

have the following aspirations for their government:  The Government focuses on developing high-quality policies  The public sector becomes more productive and is accountable for delivering better- quality services via leaner organisations and operations  A predictable, transparent and fairly enforced regulatory system facilitates economic growth  The sustainability of government finances is strengthened by reducing dependence on oil revenues to fund current expenditure 171 World Oil Outlook 2009 World Energy Outlook 2009 173 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) 172 http://www.doksihu 68  A world-class infrastructure links Bahrain to the global economy"174 Member states of the Gulf Cooperation Council are all lead by traditional families, surrounded by various settings of governance. One of the key priorities for the future would be to balance the traditions with effective governance and

transparency and also to be open-minded and cooperate. Governments seem to having had mapped the roots of current challenges and their way forward, which is already a very important step towards realizing the right reforms and build a bright future for their countries. In delivering the reforms and changes, it will be critical that the leadership of the Gulf states will focus on the long-term future and that they remain careful and proactive. That would provide a great deal of internal stability. The main threats over realizing the much-needed political and institutional reforms are regional instability on the one hand, and lack of involvement of private sector, and their nations as a whole. Regional instability, threats from the neighbouring countries would make leaders focus on the short-term stability and on making sure that the outcomes of the conflicts are less destructive, thus reforms would rather lose focus. The lack of involvement in reforms means generally fewer perspectives

to be involved, thus reforms may not be as effective, but also, reforms which are not consulted with the concerned sectors might generate reluctance towards implementing them. As far as the Gulf Cooperation Council as a unit is concerned, deeper regional economic and political integration is expected. Probably their planned monetary union will be in place: to date, four countries (Kuwait, Bahrain, Qatar and Saudi Arabia) still stick to their target year, 2010; and by 2020 it is very realistic to say that the rest two countries will also join the union. It is also expected, that soon after the monetary union is launched, GCC will shift from its current dollar peg to a basket peg, which will create a great difference in managing their common monetary policies. 175 On the longer perspective, it is possible that the GCC states will introduce common foreign policy, but that will not happen before 2020 according to the projections.176 174 Regional Pioneer to Global Contender - The Economic

Vision 2030 for Bahrain (2009) Steve Weisman, Mohsin S. Khan: The Gulf Cooperation Council: A New Global Force? (2009) 176 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) 175 http://www.doksihu 69 This looks like a very optimistic picture, however, some sources suggest that more scenarios can be possible in the future. According to this idea, the Gulf Cooperation Council would (1) remain in a status quo over the next decade, probably would implement monetary union, but their integration progress would not go much further; (2) experience a competition and divergence between the countries, and even though the GCC as a formal organization would remain at its place, decision making processes would become very difficult the level of cooperation would considerably drop; or (3) go towards deeper cohesion and unity. Based on the current situation all three options are thinkable, however, supposedly they would choose the most beneficial option

on the longer perspective, which would definitely be the deeper cohesion and unity, as their role in the world economy and politics is increasing as a group, and not as individual countries.177 177 Economic Intelligence Unit: The GCC in 2020: Outlook for the Gulf and the Global Economy (2009) http://www.doksihu 70 6.2 Conclusions and closure The countries of the Gulf Cooperation Council have come from far - from ancient trading civilizations, and desert trading centres, they became the birth place of a worldspread religion and a key link in interconnecting continents, and some time later home for the largest oil reserves on the globe. Their regional role as a trading hub, and as a centre for development, looking through their history, has remained all through the many years. This is the actual reason, why they attracted so much attention from their neighbours and other parts of the world - whoever discovered their strategic location and potential, wanted to take control over the

Gulf. However, that led to a situation, in which, for centuries, the local population was invaded or led by other nations. Local rulers were often kept in their positions, and in domestic issues they had a great power, but the wealth that could have been come with the countries position was rather oppressed by the invaders totally, or enriched them instead of the local population. The case was similar at the time of oil discovery in the Gulf region. Companies from the United States, the Netherlands, the United Kingdom, Japan and other countries sent their representatives to the Gulf sheikdoms to explore and exploit potential oil reserves there - and only a very few percentage of their success was actually seen by the Gulf states economies. Though, at that point of time they did not even have the financial and other resources to do this job themselves. As the success of oil exploration in the Persian Gulf became clear, that gave an opportunity to Gulf rules to grab higher and higher

percentages of the oil revenues, until they finally had the finances and the power to take over the most important oil companies, and start to rule their own wealth to a higher extent. This happened in the 1960s, which led to some crucial consequences not only in the further later development of the Gulf States, but also in placing themselves on the world map as individual, strong countries. Of course, this coincided with the process of becoming independent of many of the Gulf countries: Kuwait, Bahrain, Qatar and the United Arab Emirates. What actually happened was that the Gulf States started to understand the power of the commodity that they provide home for, and to understand their own power over the oil. They became conscious about what they wanted and what http://www.doksihu 71 they stood for. So as they got independent, and could practice managing their foreign relations on their own, they also, gradually, took a bigger role in regional politics. The clear evidence of this

process was the oil embargo in 1973-1974. To simplify the story: Western countries (with the United States on the front line) supported the creation of a modern Jewish state, Israel; on the sacred land of Jewish people. However, at that point of time the Palestine Authority ruled this area. Palestinians being Arabic people, the Arab world stood for Palestine from the very beginning. So did the Gulf States, and when the Yom Kippur War began in 1973, that gave an opportunity to them to express their displeasure about the fact that their economic alliances (especially the United States) supported the "enemy" in the war. And the most obvious solution for this was to cut oil exports to the United States and some other Western countries. Gulf States understood the political power that oil held for them. After this event, during the 1970s oil prices boomed, and the six Gulf countries reached a very quick ascent in the level of their wealth. However, in this first immediate rise it

seemed that the rulers of the countries did not know how to use this wealth in a wise and sustainable way. Large public spending projects started, sharing the wealth first with the top leadership and ruling family members then step by step with the whole population; while the visible increase of well-being attracted many from other Arabic countries, from South Asia, and from Europe. This was a start of an upward direction, and a showcase of "what can happen if", but the boom was followed by two decades when oil prices were kept at a low level, and the spending spree of Gulf States turned into deficits, disabling the countries to keep up a stable pace of growth during the 1980s and 1990s. Also, regional stability was very vulnerable during these years, the Iran-Iraq war, and then the First Persian Gulf war deflected the attention and resources of the six states of the Gulf Cooperation Council from their own growth process. The twenty-first century brought back the blooming to

the region: as oil prices started to stably grow again, Gulf revenues immediately started to increase, quickly clearing out most of the previous deficit, and ensuring a fast growth in every aspect of their economies. But this time, the member states of the GCC welcomed growth from a different starting point, and with key learning points from the past. First of all, the six states are now united, and gradually built up a common market by 2008, which means http://www.doksihu 72 that their economies are basically forming one unit. This makes them stronger and more resistant to decline and crisis. Secondly, the unity means not only economic, but political cooperation also. It ensures that they are taken more seriously at the level of international relations, and uplifts them to being one of the most important players in the MENA region. Last but not least, learning from mistakes of the past, this time leaders think about the future before spending all their assets. Even though what we

see first is mega-projects with mega budgets, no taxation, and lots of oil; but it is far from being a complete picture. They created long-term visions; started to build up their economies in a way that in the future they will stand on multiple revenue sources instead of depending on the mood swings of the oil market; they invest in the future of their societies; and they have started to develop and implement reforms that make their countries more sustainable. Indeed, they are working on diversifying their energy market, with the plan of using alternative energy sources in the future and contribute to global sustainability. In the mean time, their role on the global oil market keeps on growing and growing. What does this entail? Very simple: if they manage to implement their plans, the result will be that they keep their power given to them by obtaining such reserves of the black gold, while they will be less vulnerable by the potentially changing oil prices and demand, thus their

economies will keep on growing, and politically they will be more independent from other powers in the world. Their economic decisions and their word in the global politics will impact more countries. Their values and attitude will probably become a more vital part of the global community. This, of course, brings both threats and opportunities for the international community; just like it would in the case of any other country. Some of the threats can be: their growing influence on some domestic markets, for example in the United States, which can cause some damage of national interests; their views on democratic governance can question traditional perspectives on democracy; their key position in the global energy market can cause energy security threats in case of evolving regional conflicts or political interest; and, as it has just been proved, their effect on the global stock exchanges can be paralyzing. Amongst the key opportunities the first one is their potential and interest to

support developing countries of the Middle East, and elsewhere, which can support the integration process of developing economies into the http://www.doksihu 73 global economy. Due to their financial resources, the Gulf Cooperation Council is also able to contribute to balancing the global economy, especially after the global turmoil. They have the potential to create an important link between East and West, both from the perspective of trade and politics. The Gulf Cooperation Council currently plays the role of a moderator in the regional politics in the Middle East - this can be a potential role for them on the future global politics as well, a very important one indeed. And finally, they bring diversity to the global community, different perspectives and different solutions, which can challenge other countries and regions perspectives, and can provide a valuable exchange of ideas and experiences. Obviously, it is yet to be seen what will really happen. The question remains: will

the member states of the Gulf Cooperation Council realize their potential? Will they be able to really create a united and sustainable economy? Will they be able to choose their role wise in the global politics? But whatever the answer is, when oil prices move up and down, when there is progress in the Middle East peace process; or when global stock exchanges roller-coast; it worth to stop for a moment and have a look: what is happening in the Gulf? Finally, as a closure, there are three quotations to be shared, that summarize well the conclusions of this diploma thesis: ―Whoever has dominion over the oil has dominion over the economies of the world.‖178 ―Oil is big, but it is not the only reason to take the Gulf seriously‖179 ―The role of those countries, the global economies underestimate, and in my view we should re-evaluate the share, the influence they have.‖180 178 Peter David: Waking from its sleep, The Economist (2009),

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