V. Regional Implications of Adjustment in the GCC Countries
Given the traditional links to the rest of the MENA region, economic diversification and fiscal retrenchment in the GCC countries would be expected to influence the economic performance of the rest of the region through a number of channels: the flow of workers' remittances, financial aid, merchandise trade, as well as the flow of investment to the region.
• Employment opportunities in the GCC countries for foreign labor are likely to become more limited in the short run. The contraction of the oil sector would initially dampen non-oil activities, and large-scale infrastructure development has reached saturation in several countries. Moreover, there is a recent trend in the GCC countries to substitute Asian workers for workers from the region. In addition, as mentioned earlier, most of the GCC countries have initiated long-term programs of nationalization of their labor force through employment policies.
These factors suggest that with reduced reliance on foreign labor, the larger share of adjustment would possibly fall on workers from the region. In addition to the direct balance of payments impact, there would also be effects on investment and growth associated with the loss of remittances, as these flows have traditionally financed small-scale private investments (mostly in construction) in the recipient countries.
• Over the past two decades, the GCC countries have been an important source of financial support for many countries in the region, both directly through grants and soft loans, and indirectly through contributions to regional and Arab multilateral development institutions.14 During the 1974-94 period, concessional financial assistance from the GCC countries to other developing countries totaled about US$90 billion, representing 3 percent of donors' GDP. Budgetary constraints have made it difficult to maintain high levels of official financial assistance. Further expenditure restraints would be expected to result in relatively limited, though still sizeable in absolute terms, aid flows to the countries in the region.
• During 1991-94, the other countries in the MENA region accounted on average for 2-3 percent of total GCC merchandise trade (Chart 8). GCC imports from other MENA countries were dominated by food products, while mineral fuels and foodstuffs comprised the bulk of its exports to the region (Chart 9). In addition, only a few countries in the MENA region accounted for a significant share of trade with GCC (Chart 10). Looking forward, the expansion of domestic economic base and export diversification would be expected to lead, over time, to higher exports from the GCC countries to the other countries in the region, particularly in areas where the GCC countries have a clear comparative advantage (e.g., secondary and tertiary petrochemical products).
• Finally, in several countries in the region, the prospects of macroeconomic stability, supported by simplification of investment procedures and the lowering of the barriers to entry of foreign capital would offer opportunities for increased investment by the GCC countries. Moreover, the prospects of peace in the region, combined with sound economic and financial policies, would improve investment incentives and create opportunities for regional joint projects that have not been fully exploited because of sociopolitical risks. Although most GCC countries would be expected to pursue economic diversification based on domestic investment, their comfortable overall capital position would still allow large investments in the region. There are only a few other capital surplus economies in the region that could benefit from the opening of equity markets and privatization programs in the GCC countries.