Skip to main content

Advertisement

SpringerLink
Log in

Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council

  • Research Article
  • Published:
Open Economies Review Aims and scope Submit manuscript

Abstract

The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council—the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed. I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly based movement towards far-reaching political integration. And there is little evidence of that as yet.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. When the monetary base pays a nominal interest rate \(i_{t + 1}^M \) on a unit of the monetary base held between periods t and t + 1, Eq. 1) becomes: \(\sigma _t = \frac{{M_{t + 1} - \left( {1 + i_t^M } \right)M_t }}{{P_t Y_t }}\) (see Buiter 2007a).

  2. This emasculation of the National Central Banks (NCBs) has occurred despite the fact that the NCBs are the shareholders of the ECB. The only role in monetary policy formulation and design of the NCBs comes from the fact that each of them provides its Governor as a member of the rate-setting body of the ECB, the Governing Council. With Malta and Cyprus joining the EMU on January 1, 2008, there will be fifteen EU member states. Fifteen is the maximum number of NCB governors that can vote at a ECB Governing Council meetings. When the number of EMU member states exceeds 15, the NCB governors will begin to rotate as regards voting rights, even though all governors continue to have to right to participate in Governing Council meetings.

  3. As a currency basket, the SDR would appear to be a much better choice for the GCC countries than the US dollar.

  4. The anticipated inflation tax, discussed earlier, is the ability to reduce the real value of the stock of base money through inflation. The unanticipated inflation tax is the de-facto capital levy the monetary authorities can impose on holders of nominally denominated fixed-rate government debt, through an unanticipated increase in the rate of inflation and the associated increase in long-term market nominal interest rates.

References

  • Abu-Bader S, Abu-Qarn A (2006) On the optimality of a GCC Monetary Union: Structural VAR, common trends and common cycles evidence. Ben-Gurion University of the Negev, Department of Economics working papers series, No. 225, September

  • Akarli AO (2007) The GCC dream: between the BRICs and the developed world. Goldman sachs global economics paper No: 155, April. Available at https://portal.gs.com, (subscription only)

  • Al-Raisi Ali H, Pattanaik S, Yousuf Al Raisi A (2007) Transmission mechanism of monetary policy under the fixed exchange regime of Oman. Central Bank of Oman occasional paper No. 2007-1, April

  • Bayoumi T, Masson PR (1995) Fiscal flows in the United States and Canada: lessons for monetary union in Europe. Eur Econ Rev 39:253–274

    Article  Google Scholar 

  • Buiter WH (1997) The economic case for monetary union in the European union. In: Deissenberg C, Owen RF, Ulph D (eds) European economic integration. Supplement to the Review of International Economics 5(4):10–35

    Google Scholar 

  • Buiter WH (1999) Alice in Euroland. J Common Mark Stud 37(2):181–209, June

    Article  Google Scholar 

  • Buiter WH (2005) To purgatory and beyond; when and how should the accession countries from Central and Eastern Europe become full members of the EMU. In: Breuss F, Hochreiter E (eds) Challenges for Central Banks in an enlarged EMU. Springer, New York, pp 145–186

    Chapter  Google Scholar 

  • Buiter W (2006a) The ‘sense and nonsense of maastricht’ revisited: what have we learnt about stabilization in EMU? J Common Mark Stud 44(4):687–710

    Article  Google Scholar 

  • Buiter WH (2006b) Rethinking inflation targeting and Central Bank independence, Background paper for an Inaugural Lecture for the Chair of European Political Economy in the European Institute at the London School of Economics and Political Science, given on Thursday, 26th October 2006, at 18:30, in the Old Theatre, London School of Economics and Political Science

  • Buiter WH (2007a) Seigniorage, economics—the open-access, open-assessment, E-Journal, 2007–10. http://www.economics-ejournal.org/economics/journalarticles/2007-10

  • Buiter WH (2007b) Clipping wings; the case for minimalist Central Banking. Central Banking XVIII(2):28–33, November 2007

  • Buiter WH (2007c) Lessons from the 2007 financial crisis; paper submitted in evidence to the UK Treasury Select Committee in connection with my appearance before the Committee on Tuesday, 13 November 2007; Abstract here; published as CEPR Policy Insight No. 18, December 2007

  • Buiter WH, Sibert AC (2006a) Eurozone entry of new EU member states from Central Europe: should they? Could they?, with Anne C. Sibert, in Development & Transition, UNDP-LSE Newsletter, 4, June 2006, 16–19

  • Buiter WH, Sibert AC (2006b) When should the new central European members join the Eurozone? Bankni vestnik—The Journal for Money and Banking of the Bank Association of Slovenia, Special Issue, Small Economies in the Euro Area: Issues, Challenges and Opportunities, 11/2006 5–11

  • Buiter WH, Corsetti G, Pesenti P (1998) Financial markets and European monetary cooperation; the lessons of the 92–93 ERM Crisis. Cambridge University Press

  • Chamley C (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54:607–622

    Article  Google Scholar 

  • Dasgupta P, Stiglitz J (1972) On optimal taxation and public production. Review of Economic Studies 39:87–103

    Article  Google Scholar 

  • De Grauwe P (1997) The economics of monetary integration. Oxford University Press, Oxford, UK

    Google Scholar 

  • Diamond P, Mirrlees J (1971) Optimal taxation and public production I: production efficiency. Am Econ Rev 61:8–27

    Google Scholar 

  • Dormans EHM (1991) Het tekort. Staatsschuld in de tijd van de Republiek. Amsterdam, NEHA

  • Dowd K, Greenaway D (1993) Currency competition, network externalities and switching costs: towards an alternative view of optimum currency areas. Econ J 102:1180–1189

    Article  Google Scholar 

  • Eichengreen B (1996) On the links between monetary and political integration. Mimeo, University of California at Berkeley, CIDER WP #C96–077, December

  • Engel C, Rogers JH (1996) How wide is the border. Am Econ Rev 86(5):1112–11225, December

    Google Scholar 

  • Erbas SN, Behrouz G, Abed GT (2003) The GCC monetary union: some considerations for the exchange rate regime, IMF Working Papers 03/66, International Monetary Fund

  • European Commission (1990) One market, one money. European Economy, No. 44, October

  • Fasano-Filho U, Schaechter A (2003) Monetary union among member countries of the gulf cooperation council. IMF occasional papers 223, International Monetary Fund

  • Fidrmuc J, Horvath J (1999) Stability of monetary unions: lessons from the break-up of Czechoslovakia. J Comp Econ 27(4):753–781, December

    Article  Google Scholar 

  • Frankel JA, Rose AK (1997) Is EMU more justifiable ex post than ex ante? Econ J, Elsevier 41(3–5):753–760, April

    Google Scholar 

  • Frankel JA, Rose AK (1998) The endogeneity of the optimum currency area criteria. Econ J 108(449):1009–1025, July 19

    Article  Google Scholar 

  • Gilbert E (2004) What is at stake in the NAMU debates? A review of the arguments for and against north American monetary union. Int J Can Stud/Revue internationale d’études canadiennes 30:161–184

    Google Scholar 

  • Ingram J (1969) The currency area problem. In: Mundell RA, Svoboda AK (eds) Monetary problems of the international economy. Chicago University Press, Chicago, Illinois

    Google Scholar 

  • Kamar B, Naceur SB (2007) GCC Monetary union and the degree of macroeconomic policy coordination IMF Working Paper WP/07/249, October

  • Kenen PB (1969) The theory of optimal currency areas: an eclectic view. In: Mundell RA, Svoboda AK (eds) Monetary problems of the international economy. Chicago University Press, Chicago, Illinois

    Google Scholar 

  • Kenen PB (2001) Currency areas, policy domains, and the institutionalization of fixed exchange rates. Centre for Economic Performance, August

  • Kenen PB, Meade EE (2008) Regional monetary integration. Cambridge University Press, Cambridge, UK

    Google Scholar 

  • Masson PR, Taylor MP (1992) Currency unions: a survey of the issues. In: Masson PR, Taylor MP (eds) Policy issues in the operation of currency unions. Cambridge University Press, Cambridge, UK, pp 3–53

    Google Scholar 

  • McKinnon RI (1963) Optimum currency areas. Am Econ Rev 53:717–725

    Google Scholar 

  • Mundell RA (1961) A theory of optimum currency areas. Am Econ Rev 51:657–675

    Google Scholar 

  • Pattanaik S (2007) How closely the GCC approximates an optimum currency area? J Econ Integr 22(3):573–597, September

    Google Scholar 

  • Poole W (1970) Optimal choice of monetary policy instruments in a simple stochastic macromodel. Q J Econ 84:197–216

    Article  Google Scholar 

  • Sala-i-Martin X, Sachs J (1992) Fiscal federalism and optimum currency areas: evidence for Europe from the United States. In: Canzoneri MB, Grilli V, Masson PR (eds) Establishing a Central Bank: issues in Europe and lessons from the U.S. Cambridge University Press

  • Stiglitz J, Dasgupta P (1971) Differential taxation, public goods and economic efficiency. Rev Econ Stud 38:151–174

    Article  Google Scholar 

  • Sturm M, Siegfried N (2005) Regional monetary integration in the member states of the Gulf Cooperation Council. Occasional Paper Series 31, European Central Bank

  • Tietmeyer H (1998) Political consequences of monetary union, speech given at the Social Congress of the Commission of Bishop’s Conferences of the European Community, 20 February

Download references

Author information

Authors and Affiliations

  1. European Institute, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, UK

    Willem H. Buiter

Authors
  1. Willem H. Buiter
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Willem H. Buiter.

Additional information

© Willem H. Buiter 2007, 2008

Rights and permissions

Reprints and permissions

About this article

Cite this article

Buiter, W.H. Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council. Open Econ Rev 19, 579–612 (2008). https://doi.org/10.1007/s11079-008-9081-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11079-008-9081-9

Keywords

JEL Classification

Search

Navigation