Special report: consultation and consensus in Kuwait: the 18th GCC summit.

Anthony, John Duke

Dr. Anthony, president and CEO of the National Council on U.S.-Arab Relations, is the only Westerner to have been invited to attend each of the Gulf Cooperation Council's annual summits since the GCC's founding in 1981. The following text comprises excerpts from his report on the most recent annual meetings of the Heads of State Summit and the Ministerial Council session (Kuwait, December 1997).

The December 1997 Heads of State Summit and the Ministerial Council session of the six Gulf Cooperation Council (GCC) states -- Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates (UAE) -- were two of the most productive GCC gatherings in years. In nearly five days of deliberations, the member states' leaders achieved important results on economic, political, defense, and security issues, standard agenda items from one summit to the next. Whenever a summit has convened in the context of an actual or impending regional conflict, or other kind of crisis, matters pertaining to defense and security have naturally received the greatest amount of attention. However, when this has not been the case, the major focus of the year-round work of the GCC Secretariat in Riyadh has been to explore ways to further their economic cooperation.

One reason for this focus is the GCC's Economic Unity Agreement (EUA) of 1981, the year the GCC was founded. It is the oldest pan-GCC agreement and the most ambitious and far-reaching GCC initiative to date. A second reason the focus on economic issues is of paramount interest is that, as One GCC foreign minister remarked, "It's the one area of our work that affects our people the most in terms of what they have and want us to protect, as well as in terms of what they don't yet have but want us to achieve."

Notwithstanding the fact that the 1997 gathering of the GCC members' leaders was billed as the "Summit of Security," the final outcome highlighted economic issues to a greater extent than other meetings in the recent past. As a result, the participants moved a significant distance further along the road the GCC founders charted in the beginning.

THE FOUNDERS' GOALS

From the beginning, there was tacit admission by each of the founders that the pan-GCC edifice would be built over time through painstaking efforts and concrete achievements which strengthened their dc facto solidarity. This careful but deliberate approach, which enshrined the values of consultation and consensus, was central to the founding document of the GCC, the May 25, 1981 Charter. As an orienting framework, it served as the basis for a strategy to build the house of the GCC not with the wave of a wand, but with a stone mason's determined, step-by-step patience and perseverance.

Given the checkered history of previous pan-Arab schemes that went awry or achieved very little, the GCC's first novelty was its decision to avoid grand principles. Its leaders asked for authority over no one. But the founders, by dint of age-old custom and tradition, were instinctive practitioners of the art of consultation. They were consummate consensus builders, masters of administration by committee. With these skills, they began the construction of what, by any standard, is the boldest attempt at Arab cooperation yet attempted.

THE ECONOMIC UNITY AGREEMENT

The first stone in the foundation of the GCC's edifice was the aforementioned Economic Unity Agreement (EUA). The EUA comprises 28 articles, but its essence is the freedom of movement for goods, people, services, and capital. It is less grand and detailed than the European Union's 1957 Treaty of Rome, which functions as the foundation of modern Europe's modus operandi. Even so, the EUA's simple declaration of principles in support of opening the member states' borders to one another, economically and commercially, suits the GCC region's developmental style of incrementalism. In this context, the EUA can be viewed as a kind of administrative trail marker that nudged, but did not shove, the GCC governments and their bureaucrats toward greater cooperation -- through consultation and consensus -- a process that continues to this day.

Two overlapping goals are imbedded in the EUA. The first goal is the establishment of a broader and deeper community among peoples long divided by geography and, in several cases, by abiding mutual suspicion and distrust that have yet to run their course. The second goal is the construction of a set of building blocks for institutions, accords, and practices which would point the GCC country nationals in the direction of an increasingly shared future.

To date, the EUA has achieved an economic free-trade-zone among the GCC countries. Some 1,300 manufacturing establishments, in the member states, export their goods to the other five GCC countries duty free. As a group, the six are not yet able to trade duty free with their more important economic partners in Asia, Europe, and the U.S., but this is one of the organization's objectives.

TARIFFS

In the GCC's 1997 Kuwait Summit, the member states' leaders registered further progress toward the goal of unifying their external tariffs. They did so not by enactment of any specific measure so much as by renewing, for the record, their commitment to the objective. Out of 1,285 imported items to be grouped according to a specific category and rate of duty, approximately 300 categories of imports await classification. One outcome of the summit was the setting of a new target date for completing the classifications pursuant to reaching agreement on a unified external tariff system: January 1999.

Although major quantitative hurdles to achieving a unified accord on tariffs remain, a major qualitative change has occurred since last year's GCC summit. What had for years been one of the most vexing obstacles to reaching an agreement appears to have lessened substantially. To wit: several summit participants reported that the United Arab Emirates (mainly the Emirate of Dubai) has become less intractable on the matter of whether it will allow its external tariffs to rise. If those who reported on the matter unofficially are correct, it appears that the UAE is now prepared to be flexible on this issue.

An explanation is that, in order to enter into an agreement with the European Union (EU), the GCC must first achieve and maintain a common external tariff. The region's preeminent industrial giant, Saudi Arabia, has indicated that its manufacturing sector will continue to need protection from older, more competitive international industries for the foreseeable future. Dubai, in the UAE, on the other hand, is a trading state. As such, it requires a sustained policy of offering to its customers the lowest possible level of tariffs in order for it to remain competitive vis-a-vis other, similarly situated, commercial centers, e.g., Colombo, Hong Kong, Singapore.

In contrast, Saudi Arabia, among other things, needs to lower its tariffs -- from twelve to seven percent is the most frequently mentioned rate -- in order to be admitted to the World Trade Organization (WTO). The UAE's application has already been accepted. To facilitate the Kingdom's entry into the WTO, Dubai's tariffs, according to this line of reasoning, and in keeping with various compromise formulas as well as compensatory schemes that have been proposed, would need only be raised to seven percent in order to bring the disparate tariff systems into agreement.

If and when an arrangement of this or of a similar nature is achieved, the GCC's member states will have surmounted the greatest remaining hurdle preventing the unification of their external tariffs and establishment of a customs union -- the prerequisite for entering into a free trade agreement with the European Union.

Theoretically at least, Dubai, as the far smaller and more vulnerable economy vis-a-vis the comparatively comprehensive Saudi Arabian economy, would be compensated for the costs to its economy in terms of higher prices -- however short-term in nature for imported goods. The precise means, or mechanisms, through which Dubai could be compensated are not yet fully worked out. Even so, the broad outlines of some of the possibilities were discussed on the sidelines at the Kuwait Summit.

Dubai has recently rid itself of what had for decades been an expensive economic undertaking. The Emirate has agreed to merge its UAE Armed Forces Central Command with the main body of the UAE Armed Forces. The implications of the merger are greater than have been reported. In addition to the much welcomed boost to UAE military effectiveness, the financial benefits for Dubai are very substantial. Henceforth, the Central Command's de facto paymaster will be Abu Dhabi, which will translate into considerable monetary savings -- part of an unofficial compensation package -- for Dubai.

In addition, Dubai is literally running out of gas to fuel its modest industrial projects. The options for replenishment of its gas supplies are few. The UAE emirates of Sharjah and Umm Al-Qawain have gas, but nowhere near enough to meet Dubai's long-term needs.

Until recently, neighboring Oman was considered another possibility. But Oman has devised other uses for its gas. Qatar is also a possibility. But in this instance, Qatar is in competition with Abu Dhabi, which also has prodigious amounts of gas. More important, unlike Qatar, Abu Dhabi has cash. Added to this is that Abu Dhabi's Ruler, Shaikh Zayid bin Sultan Al-Nahyan, has a different strategic perspective than Qatar, as Dubai is part of the UAE, whose economic and political cohesion Zayid, who is also the UAE's president, seeks to strengthen.

In sum, Qatar is no match for Abu Dhabi. The latter, as the UAE capital, for strategic reasons related to long-term stability and security, is determined to do whatever is necessary to forge a greater sense of unity among the seven emirates, for which meeting Dubai's basic economic needs is a major requirement. Abu Dhabi is able and prepared to underbid any and all competition in order to become the long-term supplier of Dubai's gas requirements. This is another way in which Dubai will be compensated.

One GCC state official noted that "too much is made of the tariffs issue as an impediment to increased trade between the member states and the outside world." In his view, "Too little is made of other obstacles, which are far more harmful to the expansion of business."

One of these, he pointed out, is governments. "The policies of our governments," he claimed, "restrict trade far more than tariffs." Asked to explain, he said, "Look at the list. Restrictions on ownership of land. Restrictions on foreign investment. Restrictions on equity in our energy industries. Restrictions in the area of agency laws. Intellectual property abuses. The lack of transparency. It's an extensive list. How can one say that the absence of a unified external tariff is the main obstacle to increasing trade among us or between us and others when restrictions such as these, which we have inflicted upon ourselves, continue to exist?"

ELECTRICITY

Potentially, the most important economic breakthrough achieved at the Kuwait Summit was in the area of electric power-generation and distribution. For more than a decade, GCC leaders have envisioned the boost that linkage of the member states' electric power grids would give to the prospects for a more economically integrated GCC. The economic rationale is persuasive. Once in place, such a scheme will make it possible for an electric power outage or shortage in one GCC state to be met by power supplied by one or more of the other states.

The linkage will enable an across-the-board lowering of member states' expenditures for electric power generation, as needy member states will be able to tap into the anticipated surplus energy supplies of other GCC countries. Over time, it should be possible for the member states to realize very substantial savings -- Saudi Arabia is talking about saving $2 billion over a ten-year period.

In terms of the broader international scene, it will provide a means for intra-GCC and foreign investors alike to plan for far more ambitious GCC economic projects than before. Now it will be possible to plan projects with cross-border electricity requirements. In addition, countries such as Bahrain, which lack long-term sources of electric power, would be able to expand industrially by tapping into neighboring countries' electricity resources.

GAS

There was no agreement at the summit on connecting the GCC states' gas distribution systems, which is another mega economic project that has been studied for quite some time. Even so, the agreement on electricity seems to have moved forward the day when such a scheme will become a reality. The reasons are clear. Both gas and electricity are linked to what will be possible in expanding GCC industrialization, desalination, and power generation in the future.

They are also related to what the GCC countries may be able to agree on regarding the goal of maximizing the individual members' comparative economic advantages. For example, it is not out of the question that Bahrain could one day reap the kinds of benefits from inexpensive gas that Abu Dhabi is likely to provide fellow emirate Dubai. However, it would make greater economic sense for Bahrain to receive its gas from its southern neighbor Qatar, as Qatar has far more gas than it could possibly hope to put to domestic industrial use for the next two centuries.

A representative of one of the GCC countries' oil companies confided to me that, "The official line is that the gas integration scheme cannot go forward at the present time mainly for reasons of its high capitalization costs and the continuing dispute" involving mutually contested rights to sovereignty over a group of islands -- "between Bahrain and Qatar.

"Yet the idea has great merit. Bahrain has no choice but to expand its electricity supply. Only thus will it be able to enhance the prospects for meeting its industrial development and employment needs. To do this, it needs the cheapest possible power supply. Qatar has it."

PLANNING

All six GCC states are in the midst of implementing ambitious but separate five-year development plans. Overall, they have made great contributions to the degree of growth and diversification achieved by the members' economies. Thus far, however, the plans have not been coordinated. The result, according to one GCC official, is that, "We're not maximizing our potential. We could achieve far more if we could agree to devise our respective development plans in closer coordination with each other. As it is, we continue to see one state launch an effort in a particular area without seeming regard to the fact that another member is doing the same thing. This is worse than not being effective; it is wasteful.

"Sooner or later, and the sooner the better," he continued, "we will reach the point where everyone will agree that, in the production of this or that item in the GCC region, Kuwait's role will be to produce this part, Bahrain's contribution will be in manufacturing that part, Qatar will be responsible for so many parts, and Oman, Saudi Arabia, and the UAE will also have roles of some kind.

"When we reach that stage," he said, "our partners will have no choice but to take us seriously as a unified economic entity. We'll have proved to them and to ourselves that we can do it. We'll have reached the stage where, in matters pertaining to trade and joint-venture information, no one will have any option other than to consider the six of us as one."

LEGAL QUESTIONS

Legal issues were given a greater importance in this summit than in any other in recent memory. One reason has to do with the members' acknowledged need to tighten and streamline their civil and penal codes. In this and other ways, they hope to strengthen their cooperation and effectiveness not only in economic matters but, also, in the field of domestic security.

Another reason is acknowledgment of the crucial role that legal structures and systems can play in attracting or repelling intra-GCC as well as foreign investment. The doubts and uncertainties that many foreigners have when they consider business opportunities abroad are substantial and legitimate. In this regard, GCC economists and planners are well aware of the important role that the existence of a sound, fair, well-developed, and competently administered legal structure can have in persuading a would-be investor to become involved in the region's economic development.

But GCC legal issues are important not only to a potential foreign investor. Their importance applies almost equally to the GCC countries' own citizens of high net worth those whose private holdings abroad are conservatively estimated at more than $400 billion. Both sets of investors require maximum clarity and effectiveness in the rules and regulations governing the protection and repatriation of any money they might invest in a commercial or other economic venture within the GCC region.

What the Kuwait summit accomplished was significant and far-reaching. In agreeing to unify their civil and penal codes, the participants signaled their intent to put into place a system where, in theory at least, investor confidence should be heightened. Investors from one GCC country who might be attracted to an economic opportunity in another will have the potentially crucial assurance of knowing in advance that they would be operating in a legal and judicial framework and system that is broadly similar, if not in many cases identical, to their own.

Some will ask in what ways does this represent an improvement over the existense of an already-existing, GCC-approved center for commercial disputes' resolution in Bahrain, to which some 630 international arbitrators are accredited. The answer is that the two structures are expected to complement, not conflict with, one another.

Whereas the former relates almost exclusively to the peaceful settlement of business-related disputes, the latter carries with it implications of an altogether different magnitude in terms of its scope and focus. It touches issues that relate to nearly everyone -- rich and poor, young and old, powerful and weak alike.

To be sure, matters of law and judicial procedure may seem to some as rather arcane and remote in comparison to other issues that are also of great importance to foreign investors: namely, GCC defense and security. However, in reality, what the GCC countries have agreed to do in the legal arena that relates to their economic needs and objectives also has important implications in these other areas.

The more the region's inhabitants become organized and act in accordance with a single code of law, the more the GCC countries' allies further afield will agree that these six states represent an increasingly resilient and united group with which to be reckoned.

BANKING

With regard to its banking sector, the GCC region is in far better shape than any other sub-region of the Arab countries, the Middle East, or the Islamic world. The Arab world's most profitable banks, and the banks with the largest assets, include those in the GCC's member states.

Yet, despite the impressive overall wealth that GCC countries' banks represent, and despite nearly two decades of intra-GCC economic and financial cooperation in other areas, GCC cross-border banking has hardly been a growth industry. Few banks in the member states have branches in other GCC countries. Although previous GCC summits agreed to allow banks to lend money to nationals in a GCC country other than where the bank's headquarters are located, few have done so. Like movement on the possibility of unifying their currencies and adopting a single unit of exchange for internal and external use alike -- i.e., the kinds of breakthroughs that have spurred the EU's gradual financial integration -- transnational banking has been slow to occur among the GCC's banking sectors.

The absence to date of any substantial movement in the banking and financial areas noted is the result of multiple factors. One is the highly protected environment in which local banks in some GCC countries are allowed to operate. With major restrictions on foreign ownership, such banks have yet to face the cutting edge competition that foreign banks would introduce to the market. Here, as in other sectors of GCC economic life, pressures favoring the continuity of privilege remain a formidable force resistant to change.

As the GCC countries open up more and more to foreign competition en route to accommodating the rules of the World Trade Organization, their banking sectors are likely to be the hardest hit -- for example, by the requirements of stricter standards for accountability and transparency.

Among the GCC countries as a whole, in terms of the future, it is likely that a great many banks, out of necessity, will have to merge with others. Either that or they will be driven from the marketplace. There are simply too many small, minimally capitalized banks in the region for anyone to expect them to be able to play the substantial role -- as the financial arm of the private sector's increasing involvement in the GCC region's economic development -- that virtually every GCC government envisions for them in the period ahead.

CURRENCY

On the issue of whether and, if so, when the member states will adopt a single currency -- an issue of ongoing interest to investors and financial planners -- nothing of significance transpired at the summit. Nor, in the eyes of GCC leaders, was there any reason that anything should have.

The GCC countries' ministers of economy and finance, at a meeting earlier in the year, announced that the members do not see any compelling reason to switch to a single monetary unit in the immediately foreseeable future. Their stated rationale remains unassailable: their currencies are both sufficiently stable and readily convertible, as well as pegged mainly to one of the world's strongest currencies, the U.S. dollar.

THE GCC'S INTERNATIONAL BANK EXPANDS

Regardless of whether the member states eventually unify their currencies, or the Saudi riyal one day becomes a de facto super-currency, what was decided at the Kuwait Summit on a related matter will likely be looked back upon as a major turning point in GCC economic integration. The leaders agreed that not only the Bahrain-based Gulf International Bank (GIB), which is owned by the six GCC governments, but also all the GCC countries' national banks will henceforth be allowed to open branches in each of the other GCC states.

The significance of the decision regarding the GIB is several-fold. One, GCC states' depositors and borrowers alike will be able to avail themselves more easily of GIB's banking services. Second, there is a potentially important psychological dimension to this decision. By raising the GIB's presence and profile in the GCC's five other states, the goal of increasing a sense of GCC citizen ownership of the region's economic systems took another step forward.

The achievement of branch banking, or financial franchising, represents only a modest breakthrough for now. However, in the future, especially with regard to the GIB, the achievement, if it becomes a trend, could increase in importance, with possible positive implications beyond banking. For example, the GIB could evolve over time to having a role in meeting future pan-GCC centralized banking, fiscal, and monetary needs.

Moreover, whether through the GIB or the intra-regional expansion of national bank branches, it should henceforth be much easier for GCC business leaders to finance GCC cross-border trade, investment, and other commercial as well as industrial ventures.

Notwithstanding the intent behind this decision, change occurs more slowly in reality than is often envisioned in the minds of GCC's visionaries and planners. In short, the weight of other countries' bureaucratic and legal impediments, combined with the force of habit and routine, are likely to preclude any phenomenal leap in the frequency of GCC cross-border banking overnight.

A second deterrent to change is the region-wide perception that in other, mainly Western markets, such factors as economic and political stability, which are key to many investment decisions, are perceived as more readily assured. In addition, the rate of return upon a GCC citizen's foreign investments is often greater, and according to many, when they invest in Asia, Europe, or the U.S., the accompanying bureaucratic hassles associated with placing and retrieving investments tend to be fewer.

Until recently, another problem which the Kuwait Summit decision should help to redress, has been the relative absence, or low profile, of institutions such as the GIB, and the reluctance of many GCC members' banks to adopt an aggressive approach to financing pan-GCC business opportunities.

GULF INVESTMENT FUND AND CORPORATION

Closely linked to the GIB is its parent authority, the Kuwait-based Gulf Investment Fund (GIF), led by Saudi Arabian Dr. Khalid Al-Fayez. Initially capitalized in the amount of $2.2 billion at the time of its formation at the 1982 GCC summit in Bahrain, the GIF has become an increasingly profitable institution. A significant feature of the GIF's charter, from the outset, was the decision to forego being a development-oriented institution.

The GIF would leave the work of financing infrastructure and related projects -- e.g., roads, dams, clinics, etc. that, regardless of their merit, would be unable to return a respectable profit -- to other institutions in the member states. The Fund has consistently favored projects, whether inside the GCC region -- for which to date the profitable ones have been relatively few -- or elsewhere that practically guarantee the investors a hefty return. As a result, the GIF has repeatedly posted extraordinarily high annual rates of profitability. The investment acumen acquired in the process by investors and account managers is considerable and should bode well for the GCC's long-term economic needs, if mainly as a wholly-owned source of finance capital.

PRIVATIZATION

The GCC heads of state acknowledge that the concept of privatizing various state-owned economic assets has its merits. They recognize its potential to render enterprises more efficient, cost-effective, and competitive; to provide means for expansion that, for lack of government funds, might not otherwise occur; to attract inward flows of investment along with technology; to spur training and human resource development; and to broaden markets.

The leaders also recognize that the political component of any privatization process also has attractive aspects. They are conscious of a successful privatization program's potential to expand the citizens' share in their country's economy and, thereby, to achieve the goal of strengthening and expanding the middle class; to increase the opportunities and outlets for citizen input and other involvement in the country's development; to narrow the gap between society and its leaders with a view to enhancing political stability; and to transfer from the public to the private sector an increasing share of the responsibility and accountability for managing certain very complex and often costly undertakings, such as health services, electric power generation, telecommunications, and transportation.

Yet many of the leaders also view the challenge of how to design and implement a successful program of privatization as one that is fraught with complexity, for which, in the region's present stage of economic cooperation and development, conventional wisdom has no easy answers. Behind the moderately positive response to the challenge thus far is an innate sense of caution and the trend to favor the status quo unless it is broken beyond repair as well as the realization that privatization is often a long and arduous process, and -- economically as well as socially and politically -- hardly a risk-free course.

Despite a natural tendency among the GCC leaders to study the pros and cons of outsiders' recommendations at length, the economic and political merits of a selective and cautious approach to privatization of some areas of actual or would-be economic activity are recognized within the GCC region. Indeed, since the previous GCC summit in Qatar in December 1996, virtually every GCC country has registered progress in privatizing one or more components of and, in some instances, entire economic sectors.

Privatization of health services and transportation account for much of the success to date. Even telecommunications and electric power generating plants are being privatized in Oman, Saudi Arabia, and the UAE, although some had thought such sectors might be declared off limits either for security or economic reasons.

CAPITALIZATION AND STOCK MARKETS

Member states' stock exchanges have exhibited steady positive growth. In 1997, virtually every GCC country's stock market recorded extraordinary records of profitability. None failed to post gains over the previous year's earnings of less than 25 percent. Oman's Muscat Stock Exchange posted a phenomenal 141 percent profit.

The most important reason for the GCC countries' 1997 stock markets' success is the increased income derived from the higher than budgeted price for the region's petroleum exports. This, in turn, enabled governments to spend money on economic expansion projects that had previously been postponed due to lack of funds. It also enhanced government liquidity, which made it possible to pay back monies previously borrowed to finance budgetary deficits. The cumulative effect boosted investor confidence across the board, and this was reflected in the surge in stock market profitability.

But notwithstanding the vibrancy of the markets locally, the pace in which the GCC stock exchanges have expanded and opened up to outsiders has been slow, judged by Western criteria. A major reason is the influence of conservative elements among government authorities responsible for regulating and supervising the market exchanges. Such officials counsel caution. They are keen to study at greater length the lessons to be learned from the Asian financial crisis, which, they argue correctly, was caused in part by the extent to which Asian stock markets were open to foreign investment.

It is Western standards that many of those seeking to develop the region's markets hope increasingly to emulate. Yet, owing to the limited depth and breadth of equity offerings available even to local investors in these countries, let alone to foreign investors, the day when one is likely to view GCC stock exchanges as synonymous with the volume and vibrancy of exchanges in the industrialized countries is some distance away. Nonetheless, such visions remain part of GCC financial planers' long-run strategic objectives. In the interim, GCC countries' stock exchange managers will likely continue to pay special attention to the ratings that foreign financial analysts give their performances.

Saudi Arabia's exchange has, by far, the most assets of the six. However, in terms of dynamism and innovation, it is Oman's securities market that, in the past few years, has attracted the most positive attention by the international financial community. The Sultanate has attempted to generate additional sources of investment capital by liberalizing its economy in general and by increasing the degree of outsider participation in its stock market and other sectors of its development.

Bahrain has not been far behind, and Kuwait's exchange remains nearly as robust as ever. Moreover, in the past year, Bahrain and Kuwait agreed to cross list the stocks traded on their respective exchanges, a move that is soon likely to become a trend elsewhere in the region. Judged by these criteria, Saudi Arabia's exchange and the UAE's market, which, despite the vibrancy of the country's economy, operates without a trading floor, have lagged behind, while Qatar's is very small by comparison.

In the future, the GCC countries' economic reforms and market liberalization measures are likely to become more multifaceted and widespread. As the pace of the reforms increases along with the region's global competitiveness, the members' stock markets will likely play an increasingly pivotal role in raising capital for economic expansion throughout the GCC.

FEES, FUNDS AND TAXES

But stock markets and capitalization schemes alone will not be a panacea for setting the GCC countries' economies on course. At no point are they likely to be the principal factor in assessing a member state's prospects for economic development or its capacity to generate capital. Having a lot of gas and oil for sale -- for which payment is made in hard currencies, for which there is a steady international demand, and upon which the GCC governments rely for the bulk of their revenues -- will continue to count for far more.

This only highlights one of the many unique features of the GCC region's Economic situation. By contrast, governments in many other countries need to raise revenue for capital investment, or to meet recurring expenditures by taxation or the issuance of special bond issues and other debt instruments. However, a cardinal feature of the GCC countries' economies to date -- and, some would argue, one of the reasons for their social and political stability as well -- has been the absence of such mechanisms.

At some point, to be sure, the seemingly endless tax holiday for the citizens of the GCC countries will come to an end and personal income taxes will be necessary. But, for now, even with the need for innovative ways to raise funds for deficit reduction and economic expansion, apart from taxes levied upon foreign companies and citizen payments into social security funds, there are no modem income tax systems in place in any of the GCC countries.

In lieu of enacting new taxation laws, GCC governments are increasingly giving serious consideration to and, in some cases, implementing novel means of raising capital and reducing expenditures. As a result, several countries are generating capital and/or accumulating capital savings from reduced expenditures in areas that were heretofore thought impossible or ruled out on grounds of political prudence.

Examples are the results from sharply reduced subsidies for gasoline, water, and electricity use as well as wheat production. In some cases, the money generated by requiring users to pay prices more reflective of the true economic costs for these items has provided the financial wherewithal to enable new ventures -- for example, the modification and expansion of electric power plants -- to commence.

RIYALPOLITIK -- TOLLS AND TICKETS

Creative ways under consideration for generating the resources necessary for new economic undertakings, or to sustain existing ones, include the form of applying user fees for certain services. "For example," one GCC dreamer-schemer said, "take what we could do merely by charging a two riyals fee" -- approximately 66 cents -- "for everyone who drives along the road from Jeddah to Mecca. To those who would be asked to pay it, the amount would be a pittance. But, over time, the funds generated would be enormous. They would be enough to pay for all, or a considerable portion, of the Hajj (annual Islamic pilgrimage) each year. This is a big expense that has long been completely paid for by the government.

"In order to do this, one would of course have to have a major information campaign explaining the reasons. If the people expected to pay the fee know that all of the money collected will go into a special fund to be used solely to administer the Hajj, and to upgrade the facilities and services extended to the pilgrims, the likelihood is not only that no one will mind; most would see it as part of their duty. Practically everyone would feel a sense of pride in having played a part, however small, in enabling others to perform the Hajj.

"Applying the same concept," he continued, "one could charge two riyals to everyone who attends a football (soccer) game in one of the public stadiums. Here again, the need for a national awareness campaign explaining the reasons would be obvious. Over time, such a small fee would enable the government to acquire billions of riyals with which to finance the building of new stadiums and sports clubs. As it is, the public has grown accustomed to expecting the government to come up with the money to do these things.

"And, to give another example, if everyone who uses the international airport terminals were required to pay a ten riyal departure fee -- as Bahrain's airport and many other airports in the Arab world require -- additional billions would be generated. Such monies could be applied towards future expenditures for improving the airports' facilities and services. The revenue generated could be used to free up scarce government capital for investment in other sectors."

From the foregoing, it is clear that many GCC financial planners, investment strategists, and others take issue with many Westerners' tendency to dismiss, or not view seriously, the capacity of GCC countries' leaders to devise a diverse and innovative array of techniques to enhance their countries' and the region's economic prospects. But intra-GCC economic planners are among the first to acknowledge that the way forward will not be easy. They admit that they need to rely more and more on what they and other GCC nationals can do themselves, as illustrated in some of the examples cited herein, to solve the capitalization and related challenges for sustaining, and where possible, expanding the member states' economic growth.

FOREIGN INVESTMENT

Not surprisingly, the GCC members with the lowest cash flows (Bahrain, Oman, and Qatar) are ahead of the others in terms of increasing incentives to attract sources of outside capital for development. To this end, all three for quite some time (Qatar more recently than the others) have permitted varying degrees of foreign equity participation in their energy industries and other sectors of their economies.

By contrast, the three most "liquid" GCC countries (Kuwait, Saudi Arabia, and the UAE) are of the view that, apart from increasing the number of joint commercial ventures with foreign firms, their needs are not yet such as to warrant opening up the flood gates to inward equity investment in their stock markets. To be sure, the number of exceptions is increasing. But the standard 49-percent-foreign/51-percent-local ownership formula continues to hold in most instances. In a different category of investment and economic operation, foreign companies of a certain level of capitalization are allowed to operate in the UAE's several "free zones," and in Bahrain's and Oman's as well, with extended tax-free benefits as well as up to 100 percent foreign ownership.

Four sectors remain largely closed to such ownership: oil, gas, land, and, to a lesser extent, banking. Even so, the time may be drawing near when the question of whether to allow foreign investment, in even these hallowed sectors, will be revisited at the level of national policy making. Indeed, at the Kuwait Summit, there was agreement that the member states must continue the work already underway in preparation for what, one day, may become a pan-GCC investment law.

The merits of such a liberalized law, or at least the adoption of a common legal framework for encouraging and protecting foreign investment, are not solely economic and political. This writer endorses the economic and political rationales but, for the sake of argument, adds another, potentially more powerful, dimension: enhanced national and regional defense.

If select foreign powers were allowed to become more engaged in the development and production of the member states' energy industries, these powers would be more likely to see that the GCC region's defense is assured. They would be likely to do this not merely to protect their investment, but because the very nature of the investment would be directly related to their national defense and economic interests.

The three countries that would be the most eager to enter into such mutually beneficial arrangements with the GCC countries are the ones that are already the most involved in the GCC region's energy industries: the United States, Great Britain, and France. In terms of the overriding collective defense needs that could be served, an argument could be made that there is merit in inclusivity, which, in this case, would entail making room for China and Russia. In such a manner, the five U.N. Security Council members, each of which has veto powers, would have a direct, tangible, vested interest in GCC peace, stability, and defense, the likes of which has never before existed.

A MONROE DOCTRINE FOR THE GCC REGION?

Not only militarily, but also politically and economically, an arrangement of this nature could become the most effective deterrence and defense system the Gulf has ever had. Extended beyond Britain and France to include China and Russia, and keying off the over-arching hemispheric concept that has long determined deterrence and defense in the Caribbean, the arrangement would be akin to casting an Arabian Monroe Doctrine over what is, by far, the world's largest proven source of energy.

In a global context it would be akin to taking the UNESCO concept -- of proclaiming that a particular archaeological or cultural treasure is henceforth to be protected in perpetuity for the benefit of all humankind -- and applying it to the GCC region, for the reason that its resources are indisputably vital to the material well-being of everyone.

However attractive the analytical merits of this idea may be, one should not underestimate the power of forces likely to be opposed to it. Because the GCC's energy resources are almost certain to remain a vital strategic commodity far into the future, the countries that presently enjoy a comparative advantage vis-a-vis others in terms of their access to them -- namely, the U.S., Great Britain, France, and Japan -- are likely to oppose such an idea for their own self interests.

The weight in favor of continuing the overall status quo in this instance would likely be considerable. One is already seeing the extent to which France and Russia, in particular, are eager to change a considerable portion of the energy and other economic status quo as pertains to Iran and Iraq. Yet, the rub is that it is not Iran or Iraq that need protecting so much, if at all, as the GCC countries.

For this reason alone, the perceived imperative of finding a means to make defending the Gulf at once less costly and more collectively assured would suggest that such a concept needs to be examined further. The purpose would be to ascertain in some detail what potential positive prospects such a novel arrangement -- giving each of the Permanent Members of the U.N. Security Council a direct stake in the GCC region's economic well-being and protection -- may hold for a differently configured and possibly more assured system of Gulf stability and defense in the future.

DOMESTIC POLITICS

At their meetings in Kuwait, the member states' leaders addressed political issues at considerable length. The reasons were clear. In the minds of many GCC leaders, the synergistic link between greater GCC economic integration, on one hand, and the prospects for enhanced political stability and domestic security within and among the member states, on the other, is perceived as being closer than ever before.

It was partly in the context, the onset of glasnost and the liberalization and political reform that subsequently swept the former Central and East European states, and partly in reaction to Iran's ongoing efforts to destabilize various GCC polities from 1979 onwards, that, at the 1989 Summit in Muscat, Omani host Sultan Qaboos took the initiative to address this topic head-on. Qaboos made a special effort to persuade his colleagues of the need to consider what was happening in the former Soviet Bloc countries' political systems in terms of its possible implications for the GCC states.

Since that time, Oman has moved the fastest and, to date, the farthest in implementing political reforms. Many of the other GCC countries' leaders unofficially concede that Oman's approach to political reform -- both in its nature as well as in its pace and extent -- is the one they admire the most.

Oman's perspective on the determinants of political stability has at its core an acknowledgment that the stability of virtually all polities is determined more or less by how well governments address, in the eyes of their citizens, a combination of needs in three areas: (1) internal security, (2) external defense, and (3) a steadily improving or stable standard of living. Governments that satisfactorily address all three needs are likely to be stable polities; those that fail to do so are either inherently unstable or are headed in that direction.

Each of the GCC countries is engaged in efforts to be judged successful by these and other criteria. A GCC official directly involved in these matters explained: "The domestic political challenge and much of our national security challenge, as well, embrace both a horizontal and a vertical dimension. The former," he stressed, "is already well underway. It consists of Defense Cooperation Agreements and related military understandings and undertakings between the GCC countries and our major defense partners.

"The latter," he said, "is taking place within each of the GCC countries. It is aimed at narrowing the gap between leaders and their constituents. We seek to close any space, whether actual or perceived, between the two that might tempt an intrusion by outside forces.

"Our goal is to remove any basis for an Iraqi, Iranian, or anyone else to believe that internal circumstances among us might warrant a policy of threat or other intimidation." The attainment of greater vertical integration between and among the various social strata within the member states, The leaders agreed that the time has come to allow a significantly higher level of citizen input and comment on matter of interest and concern to the members as a whole. according to this line of reasoning, will make for greater national strength and resilience of each of the GCC' s units.

Numerous Defense Cooperation Agreements or similar agreements and understandings have been signed or entered into between the GCC states and the five Permanent Members of the U.N. Security Council: China, France, Great Britain, Russia, and the United States. Add to these arrangements the elements of training, joint maneuvers, defense equipment procurement, infrastructure construction, systems acquisition, and the sharing of information, and one has gone a long way towards enhancing the member countries' legitimate defense needs.

POPULAR PARTICIPATION

Internal security is in many ways the more complex of the challenges that must be faced if the goal of political stability is to be secured from within. As one of the member states' leading political strategists explained, "The goal is to give citizens a sense of greater ownership of and identification with the existing governmental systems. If most citizens perceive their government to be doing a reasonably good job, we think they will likely be supportive of, not in opposition to, their governments.

"Key to earning their support," he continued, "is increasing their sense of participation and stake within the system. There is no one way to do this. There are many. But the point is to get the people involved in one way or another. Let them share in the responsibility, and also some of the blame, for issues that affect our and their lives. There is a great deal that can be done and needs to be done in this area.

"The important point is that we have begun and that we're serious. It will take a long time. But with each step, the overall stability of our governments should be enhanced. We cannot allow a vacuum to exist. We must do all that we can to close the cracks and holes through which outsiders might seek to meddle and interfere in pursuit of their interests, not ours."

It is in this way that virtually all of the GCC countries' governments have taken steps to broaden the quantity and quality of participation in their national development processes. In this regard, the Kuwait Summit was unique: it marked a watershed in pan-GCC consensus on political issues. The leaders agreed that the time has come to allow a significantly higher level of citizen input and comment on matters of interest and concern to the members as a whole.

NEW PAN-GCC CONSULTATIVE COUNCIL

To this end, the GCC's Supreme Council, which consists of the six states' rulers, agreed to establish a pan-GCC Consultative Council comprising 30 members, five from each GCC state. The councilors will have authority to weigh and deliberate whatever issues the Supreme Council may refer to them. The heads of state were especially keen to emphasize that the new assembly must not become encumbered with administrative or bureaucratic obstacles that could impair its work.

The assembly's members, they stressed, would be chosen from the ranks of those among the citizenry who have broad experience in dealing with matters of public importance. Although it was not explicitly stated, various summit participants indicated that none of the Consultative Council's members will come from the region's ruling families.

The establishment of the Consultative Council will add yet another political participation forum to the six national (and in Saudi Arabia ten regional/provincial) ones that already exist. These other political bodies are either directly elected (Kuwait), partially-elected (Oman and Qatar), or appointed (Bahrain, Saudi Arabia, and the UAE).

If the topics deliberated by the existing assemblies to date are any guide, the GCC councilors' responsibilities are likely to encompass, among other things, economics, commerce, finance, education, social services, and legal matters -- issues that cover a wide swath of citizen needs and expectations.

IMPLICATIONS FOR STABILITY, DETERRENCE, AND DEFENSE

There are several reasons for highlighting the nature and extent of intra-GCC progress on the domestic political front. First, the phenomenon has been under-reported in the West, including the United States, where there is a pressing need to enhance American -- especially Congressional and media -- awareness of such developments.

Second, it illuminates the way in which the six countries' leaders have taken steps to enhance the region's overall stability and, hence, its defense. Third, it underscores the seriousness of the GCC experiment. To this end, it gives tangible evidence of the GCC as an enterprise that is vibrant and pioneering, that is aimed at addressing real regional requirements, that is increasingly relevant to the needs and concerns of its citizenry, and that continues to seek more effective ways to enhance intra-GCC cooperation and development for specific, consensually agreed objectives.

But the GCC's domestic political reforms are also important for another reason. This is the way in which what is taking place on the domestic front within each of the GCC states and, now, all of them as a whole, has the potential to enhance political stability and internal security in the future.

CONTINUITY, CHANGE, AND HISTORY'S LESSONS

The needs, concerns, and interests of any allies -- and certainly the convictions, commitments, and national priorities of their leaders -- may and often do change over time. All the defense cooperation agreements, and all the pre-positioning, training, exercising, and information-sharing possible, all the mobilizations and deployments of allied countries' armed forces -- the horizontal, external components of Gulf defense will come to naught if domestic stability is not also assured. With the exception of those aspects of their foreign policies that may exacerbate or alleviate existing political strains, the challenge of securing and maintaining this latter component of political stability, at the operational level, is likely to remain beyond the reach of allied coalition defense planners.

On the other hand, what allied coalition countries' planners agree upon as appropriate regional and bilateral defense policies can indeed have, and have had, an impact on such matters as intra-GCC political stability and domestic tranquillity. U.S. covert involvement with Israel in arming Iran during the Iran-Iraq War -- a major conflict that had a disastrous effect on stability throughout the Gulf -- is a dramatic case in point.

When the story of the U.S.-Israel Iran-Contra scandal broke, the immediate impact, beyond causing acute embarrassment to each of America's Arab allies, occasioned an unprecedented and profound diminution of trust and confidence among the GCC members in U.S. credibility and intentions. Barely days afterwards, Kuwait's government asked the Soviet Union if it would help protect Kuwaiti shipping against Iranian attacks.

In the words of one GCC head of state, the United States had stabbed them in the back. For the first time in the history of any country in the region, Kuwait requested Soviet involvement in Gulf defense matters -- a Tsarist-era dream that had existed for hundreds of years -- thereby dealing a body blow to a fundamental American strategic objective forged a quarter of a century before and a European goal dating back centuries earlier.

THE DOMESTIC COMPONENT OF COLLECTIVE DEFENSE

The GCC countries have contributed and continue to contribute to Gulf defense and stability. Viewed from afar, their contributions can be seen as an appropriate, much-needed, and welcomed division of labor. Critics who dismiss the abilities of the GCC countries to contribute anything meaningful to regional defense will disagree, of course, but one need only ponder the implications were the opposite the case.

GCC state contributions to domestic security are directly related to the likelihood of whether, when, and how the allied coalition countries might be required to mobilize and deploy to the Gulf again -- and with what numbers, force configurations, and other agreements when and if they do. The continuing demand in the U.S., Great Britain, and elsewhere for limited funds and personnel to maintain indefinitely an American, British, French, and other allied regional defense posture would be far greater were it not for the GCC countries' contributions to domestic stability throughout the region.

In the annals of Arabian history, this effort among the GCC states to bring their political systems more closely together is not a new idea. The dream of a more integrated, if not united, GCC region is as old as Islam itself. There were times, in the distant past, when it had been a reality.

At the peak of Arabia's power in the generation immediately following the death of the Prophet Muhammad, the GCC region's beliefs, institutions, and practices spanned an area from the Pyrenees in western Europe to the Indus River Valley in south Asia. Unlike either of the world's other two monotheistic faiths, Islam left an enduring imprint upon virtually all of North Africa and Central Asia, an imprint that has only deepened and expanded with the passage of time.

But significantly, in light of later history, the region's people and politics grew apart. For a time, in the twilight of the present century, military men here and there -- in Egypt, Iraq, Libya, Sudan, Syria, and Yemen -- sought to establish a new Arab order. Along with them came Arab nationalists who hearkened back to ethnic pride and a once-glorious past in an unsuccessful effort to forge an appropriate ideological framework with which to confront contemporary economic and political challenges. Now more dormant than dead, the currency of Arab unity, in its literal sense, if not also the currency of Arab nationalism, has depreciated in the wake of one setback after another in the unending saga oft he Israeli-Palestinian and broader Arab-Israeli conflict.

RADICALISM IN THE RAIMENT OF RELIGION

Not altogether in its place, but certainly alongside it and vying for supremacy, is a new and different currency, minted sometime ago but only recently introduced in substantial quantity: regional radicalism dressed in the raiment of religion. The frustrations born of mounting unemployment, and its silent but deadly assault on one's sense of worth and dignity; the insecurities brought about by living in the shadows of revenge-minded Iranians and Iraqis; and the pressures of modernization are three of the most prominent sources of societal malaise in the GCC region.

Because of the pervasiveness of these phenomena throughout the region as a whole, some people are more open to the idea of a group or movement which promises a sterner kind of rule. Such promises appeal to wounded pride by evoking a selectively remembered past, which, in its political use by leaders in the more militant movements, is similar in style to the austerity and spartan conditions experienced by the thousands of Arabs and others who, from 1979 onwards, left their homelands to join their Muslim brethren in the fight against Soviet aggression in Afghanistan.

GCC countries' leaders are quick to acknowledge that the challenges represented by these various anti-status-quo groups and movements pose difficult questions to those in the arena of governance. But if the GCC is nothing else, it represents a hope among its leaders -- whose own origins are anchored in traditional structures -- not to succumb to the past manifestations of jealousy and distrust, of division and fragmentation, that would preclude their experiment's success. There has been a major diminution of parochialism among the member states in this century but, until eighteen years ago, no region-wide cooperative organization -- that links them multilaterally and functionally -- like the GCC.

Seen up close, what has occurred and is continuing to take place in the area of domestic political reform within the GCC countries is, therefore, much more significant than what appears at first glance.

From a macro-political perspective, the reforms are evidence of a pan-GCC willingness to do whatever is possible to avoid another major conflagration in a region of global strategic importance. It is the placement of one more set of bricks and mortar in the economic, social, and political foundations of an edifice-in-the-making -- one that is protected from within and without -- the likes of which the modern Arab world has never seen.