I. Introduction
The GCC countries face important policy challenges and opportunities in view of an uncertain oil market outlook and the evolving trends in the regional and international economy. These are compounded by domestic developments, particularly the growing number of nationals entering the labor markets. Indeed, the GCC countries are at a crossroad. One path, built on insufficient policy response to less favorable external conditions, carries the risk of low rates of economic growth, rising unemployment, and growing financial imbalances and indebtedness. The second, stressing economic adjustment supported by structural reforms, promises financial stability, growing employment opportunities, and sustained economic growth.
Policymakers in the GCC countries recognize the challenges facing their economies. This has been reflected in the renewed emphasis placed on broadening and intensifying the adjustment and reform efforts--efforts that were interrupted by the 1990-91 regional crisis triggered by Iraq's invasion of Kuwait. Having identified the economic and financial challenges and the appropriate policy response, the issue now is to implement the policy agenda in a decisive and sustained manner.
The economies of the GCC countries share many structural features, face similar constraints, and are influenced broadly by the same set of trends in the world economy. Over the years, the oil income has created a modern physical and social infrastructure and substantially raised the standard of living of the population (Box 1 and Table 1). The countries have established a tradition of open and liberal trade and exchange policies, low inflation, and stable currencies. They also share a relatively narrow non-oil revenue base and large dependence on imports of goods and labor, increasing their vulnerability to adverse exogenous developments.
The major policy challenge in the period ahead is to exploit further the countries' economic and financial attributes by effectively addressing macroeconomic imbalances, correcting remaining structural rigidities, and reducing the vulnerability of the economies. While differences between the GCC countries with regard to resource endowment, foreign reserves cushion, and economic diversification are likely to influence the speed and the depth of the required policy effort, there are enough similarities to discuss a broad common strategy.
The organization of the paper is as follows. Economic developments and policies since 1980 are briefly reviewed in Section II. The impact of the GCC's external environment is discussed in Section III. Section IV discusses the medium-term economic prospects and the broad outlines of a common adjustment and reform strategy. Finally, the implications of adjustment in the GCC countries on the rest of the MENA region are discussed in Section V.