Gulf Cooperation Council

The Gulf Cooperation Council (GCC) was formed in 1981 to create economic, scientific and business cooperation among its oil-exporting members. These Middle East countries share the common faith of Islam, an Arabian culture, and an economic interest separate from OPEC. On a per capita basis, they are among the richest countries in the world. The Gulf Cooperatoin Council headquarters is in Riyadh, the capital of Saudi Arabia, its largest member. Together, they supply one third of U.S. oil and own up to $225 billion of U.S. debt. These countries are seeking to diversify their rapidly growing economies away from oil.

The GCC consists of six members:

1. The Kingdom of Bahrain - Its 1.2 million people enjoy a GDP per capita of $40,500. Its economy grew 4.5% in 2010.
2. Kuwait - Its population is double that of Bahrain. They enjoy the 10th highest standard of living ($48,900 per person). The country holds 9% of the world's oil reserves.
3. The Sultanate of Oman - Its dwindling oil reserves means it's increasingly relying on tourism to improve the lifestyle of its 3 million residents.
4. Qatar - The richest country in the world, with a GDP per capita of $179,000 for its 848,000 residents. It has 25 billion barrels of proven oil reserves and 14% of the world's natural gas reserves.
5. The Kingdom of Saudi Arabia - The largest of the GCC countries (26 million people) has 20% of the world's proven oil reserves. Its GDP per capita is only $24,200.
6. The United Arab Emirates (UAE) - Its 5.1 million people enjoy a per capita GDP of $49,600 thanks to a diversifying economy that includes Dubai and the world's tallest building, the Burj Dubai.

The World Economic Forum did a study on The report concluded that to succeed in diversification, the GCC countries must further educate their people to support business research and development. Currently, these countries must import foreign workers to fill this need.

These countries have been ruled by family-based sultanates. Their leaders realize that further education could be risky, since a worldly population may want to change the way their country is ruled. The leaders of the GCC must walk a fine line between modernizing their economies and creating further social disorder, similar to the Arab Spring. Bahrain has had some riots, but military reprisals have kept the rulers in power as of 2011.(Source: WEF, The GCC Countries and the World: Scenarios to 2025, May 19, 2007; Washington Post, Arab Spring Yields Different Results in Bahrain, Egypt and Libya, December 20, 2011)

The report highlights the danger of the U.S. attacking Iranian nuclear facilities. The possible retaliation by Iran against military bases in the Middle East could spark an all-out regional conflagration and potentially lead to a global recession. This would make it nearly impossible for the GCC leaders to modernize their countries while trying to improve internal security.

The report also highlights a “best case” scenario, in which GCC countries continue their current attempts to broker peace in the Middle East while also continuing to develop their economies, as has been done in Dubai, UAE, and Qatar.

The GCC countries may drop their peg to the dollar by 2010 if they follow the recommendations in a recent Abu Dhabi report. The GCC official policy is that they will retain the peg until the Council has created a monetary union, similar to the EU, among its members.

The peg fixes the exchange rate of each countries currency to the dollar. Since the dollar has declined 40% since 2002, this has caused an inflation rate of 10% in these countries by forcing the price of oil and other commodities to increase. If they no longer peg to the dollar, they will not need to buy so many Treasuries to stabilize their exchange rate. This will cause the dollar to decline further, causing more inflation in the U.S.

On the other hand, it will also mean that oil is no longer priced in dollars. This could result in lower oil prices. However, nothing will happen quickly -- the report admitted that potential implications need to be well-studied.

The report was issued by the Abu Dhabi Department of Planning and Economy (DPE). It is the first official recommendation to drop the peg since Kuwait switched to an exchange rate based on a basket of currencies. The report suggests that the GCC countries follow suit, basing the basket on the currencies of Europe and Asia, which have become a larger trading area. (Source: The Economist, Dropping the Peg, July 8, 2008) (Article updated January 4, 2012)