What Are the Potential Economic Benefits of Enlarging the Gulf Cooperation Council?

Topics: Economics, Perfect competition, Monopoly Pages: 48 (12775 words) Published: July 5, 2010
WP/04/152

What Are the Potential Economic Benefits of Enlarging the Gulf Cooperation Council? Saade Chami, Selim Elekdag, and Ivan Tchakarov

© 2004 International Monetary Fund

WP/04/152

IMF Working Paper Middle East and Central Asia Department What Are the Potential Economic Benefits of Enlarging the Gulf Cooperation Council? Prepared by Saade Chami, Selim Elekdag, and Ivan Tchakarov1 August 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

This paper uses a variant of the IMF's Global Economy Model (GEM) to estimate the macroeconomic effects of Yemen’s full accession into the Gulf Cooperation Council (GCC). After calibrating the model to Yemen and the GCC countries, several simulations were carried out to estimate the potential impact of economic integration on both. The paper draws two fundamental conclusions. First, further steps in regional integration would enhance competition and produce large economic benefits for both Yemen and the GCC countries. In particular, we show that in some cases economic integration could increase GDP in Yemen by as much as 18 percent and in the GCC by as much as 20 percent over the long run. Second, even if market structures do not improve substantially, GCC enlargement can still generate substantial spillover gains with consumption increasing by up to 7 percent in Yemen and 8 percent in the GCC, respectively. JEL Classification Numbers: F02, F41, F47 Keywords: regional integration, competition, IMF’s Global Economy Model (GEM) Authors’ E-Mail Addresses: schami@imf.org; selekdag@imf.org; itchakarov@imf.org

Saade Chami is a Division Chief in the Middle East and Central Asia Department, Selim Elekdag is an Economist in the Middle East and Central Asia Department, and Ivan Tchakarov is an Economist in the Research Department. The authors are indebted to Douglas Laxton for his invaluable comments, constant support, and encouragement. Susanna Mursula and Dirk Muir have been extremely helpful in developing the procedures used in the model simulations. All remaining errors are the authors’. 1

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Contents I.

Page

Introduction...................................................................................................................3

II. The Benefits of Economic Integration..... .....................................................................4 III. The Model....................................................................................................................5 A. Consumption Goods ...............................................................................................5 B. Intermediate Goods .................................................................................................6 C. Price Setting ...........................................................................................................6 D. Consumer Optimization..........................................................................................7 E. Calibration and Model Properties. ..........................................................................8 F. Drawbacks and Advantages of the GEM Model in the Present Context................9 IV. The Long-Run Economic Impact of GCC Enlargement..... .........................................9 A. Improving the Product and Labor Markets in Yemen ..........................................10 B. Improving the Product and Labor Markets in the GCC........................................11 C. Improving the Labor Market in the GCC and the Product Market in Yemen ......12 V. Dynamic Simulations..................................................................................................13 VI. Conclusion...

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