Arabian Gulf needs greater economic integration and coordinated policies, OECD deputy chief says

Mari Kiviniemi, the deputy secretary general of the OECD, says that integration is needed for a common currency regime to really work. Thomas Samson / AFP

The Mena region should target greater economic integration to nudge growth higher and as a precursor to a single currency in the Arabian Gulf region, says the deputy secretary general of the OECD.

"This [Mena] region is one of the least globally and regionally integrated regions in terms of intra-regional exports of goods and FDI [foreign direct investment] so there is a lot of room for improvement," Mari Kiviniemi told The National on Saturday in Dubai.

Plans to create a single currency in the Gulf region have to be preceded by a number of steps beginning with coordination of economic policies, according to Ms Kiviniemi, a former prime minister of Finland.

“As is the case in the European Union and the euro area, common currency is a good thing, but integration is needed so that it really works and that has been the challenge in the European Union because the development level has not been the same in all the euro countries,” she said.

“Also common regulation and standards are needed and then after the integration has been going on longer it is possible to think of a single currency [in the Gulf region]. In the long run, it could be the goal but not now.”

Gulf states have put off plans to have a common currency, especially since the UAE and Oman have opted to stay outside the monetary union. The UAE quit in 2009 after expressing reservations about Riyadh hosting a proposed unified central bank.

Gulf states, though, are trying to coordinate other polices, such as the introduction of a Gulf-wide 5 per cent value added tax next year.

Oil producers, such as the Gulf states that peg their currencies to the strong US dollar, except for Kuwait, also need reforms.

“The best ways to tackle the challenges in the fluctuation of the oil price and dollar price is to diversify the economy so that this region is less dependent on one sector [and] less dependent on oil so that growth is created by other sectors and other companies,” said Ms Kiviniemi.

The Mena region, particularly oil producers, also need to foster entrepreneurship, reduce the role of the public sector in the economy and support small and medium-sized enterprises (SMEs) as part of reforms aimed at weaning themselves from oil income.

“In many countries the public sector is rather big, so what is needed is to create that kind of business environment for entrepreneurship and SMEs that encourages development of the private sector,” she said.

“Less regulation, access to finance, less red tape are needed. Corruption is one of the challenges in many countries as well as in the Mena region. All the countries need to invest in human resources.”

The Mena region also faces global threats, such as the growing discourse about trade and investment protectionism, especially in a country like the US, where president Donald Trump has touted his “America First” motto to protect local industries.

Any attempt at protectionism will affect global growth, which is expected to accelerate to 3.3 per cent this year and 3.6 per cent next year from 2.9 per cent in 2016, according to OECD forecasts. Next year’s growth forecast of 3.6 per cent would be the fastest since 2011. Growth this year and next will be driven by fiscal stimulus prospects in the US and China, and easing of fiscal consolidation in Europe.

“This [protectionism] is something which really is not needed because trade and investment are drivers of growth and they have been lagging behind,” said Ms Kiviniemi. “We are used to trade growth figures which are about twice the GDP growth, but this hasn’t been the case since the recession.”

The World Trade Organization in September lowered its global trade growth forecast for this year to between 1.8 per cent and 3.1 per cent from the previous estimate of 3.6 per cent. The UN body cited risks to global growth, including Brexit, anti-trade rhetoric and financial volatility from monetary policy changes in developed countries.

The talk about trade protectionism is not only limited to the US. Some European countries have voiced concerns about the European single market. With elections in Germany, the Netherlands and France nearing, some candidates are talking down the European Union.

“When it comes to the European stance of course I [would] say that I’m not expecting from the EU’s side increased protectionism although there are some worrying discussions in some countries,” said Ms Kiviniemi.

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