The sun rises from the east and sets in the west; but for the last few years, the sun never seems to set on the Gulf Region. After the Iran-Iraq war in May of 1981, the Gulf Cooperation Council (GCC) was established by six Gulf Countries (Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain and Oman). The first four of these countries also happen to be heavyweights in the Organization of Petroleum Exporting Countries (OPEC); with Saudi Arabia arguably the most powerful among them. The main aims of the council are to foster and maintain communication and partnership between the member states across areas of joint concern including finance, economy, trade, security, and education. In 2003, the GCC founded the customs union in the hopes of boosting mutual trade.1 Furthermore, the council is planning to establish a monetary union in 2010 , which today seems to be an impossible feat given the prevailing and unacceptably high levels of inflation among the GCC members.
Looking at the GCC's interaction with other customs unions and markets, certain dynamics emerge. The GCC-European Union (EU) bilateral relationship first came about after the 1988 Cooperation Agreement signed between them. Despite stalls and standstills in the relationship at times, the GCC and EU have made gradual progress in their negotiations over a Free Trade Agreement (FTA), which was a part of the commitment package formalized by the Agreement 2 Significant progress has been made on a FTA between the GCC and Turkey, China and India. But the relationship between the GCC and the United States is more complicated. Since the GCC countries have a security dependency on the US, they tend to adopt a more conciliatory approach and develop formulas to accommodate US interests in their region. A schism emerged in the US-Gulf comardarie over the 2003 US invasion of Iraq, heralding a so-called version of democracy. Although some GCC members opposed the invasion, others, like Kuwait, signaled their support for the US-led operation. Economic-wise, like Bahrain and Oman which already have an FTA with the US, the rest of the council has an open door policy for a possible future agreement.3
The price hikes for commodities and oil have caused nearly all countries to turn their near undivided attention to the Gulf region. The latest export data for Turkey can be taken as evidence of this trend. According to Turkeys' Exporters Council data on August exports, the United Arab Emirates (UAE) ranks highest on the list of top countries to which Turkey exports. Since UAE ranked tenth at the same time last year, this data also shows the enormous depths the economic crisis has reached recently in the US and EU countries.4
According to the World Economic Forum's 2007 report on the GCC, there are three possible scenarios for the future of GCC countries by 2025; broadly these are characterized as an "oasis", "sandstorm" or "the fertile gulf". Oasis implies that regional stability would persist as a challenge for GCC countries, but through innovative thinking and cooperation success on achieving critical reforms would be within reach. Sandstorm foresees a future of complex and messy regional instability which would prevent GCC countries from implementing necessary institutional reforms. The Fertile Gulf foresees the rise of the GCC countries not only in their region but in the global environment as well, thanks in large part to the impact of global markets and the persistent demand for oil. Looking forward, the GCC region is more closely aligned to the "The Fertile Gulf" scenario, based on the projection that oil and gas prices will continue to be on the rise, as is the case today. 5
When we look at the price levels of oil throughout 1980s and 1990s, they were really lower than the levels reached after adjusting the inflation on prices. In 2000, the OPEC Reference Basket (ORB) price had been around $28 per barrel. Later in 2007, the ORB price had been around $70 per barrel. However, until a few months ago, ORB price passed $140 per barrel. There are some reasons behind this sharp price boom. The first reason is weak the dollar. The US dollar lost its value against other currencies, especially those of the developing countries'. For instance, 1€ was around $1.3 in 2007; though we have seen the rate of $1.6 in 2008. The other reason is that since equity markets around the developed countries performed badly, people speculated on the future exchange and over-the-counter exchange about oil paper. Hence, prices rose steeply.6
Because of the fact that OPEC has around 78 percent of all proven crude oil reserves around the world and 50 percent of this reserve belongs to the Gulf region, price increases means more substantial wealth for the region. If we need more proof of this, then consider that in 2000, Saudi Arabia's value of oil exports was around $50 billion. Nonetheless, this number has reached around $300 billion in recent years, which has added on to the importance of sovereign wealth funds (SWFs) and is linked to the inflation problem. 7

Sovereign Wealth Funds (SWFs)?
SWFs are state-owned investment funds that invest in not only the domestic market but also abroad. The first SWF was founded around the 1950s in Kuwait by the Kuwait Investment Authority (KIA) to invest surplus oil revenues until surcease of oil drilling. However, as you see in Chart 1, now the biggest SWF in the world belongs to Abu Dhabi Investment Authority (AIDA). According to US Department of Treasury estimates, these funds control about $2.5 trillion, an increase of $1.5 trillion from 2006.8 Nevertheless, these funds are substantial for the global economy because of the liquidity problem and economic Chart - 1 (Source: Oxford Economics) slowdown in developed countries, albeit SWFs explain less than 2% of global traded securities.9 Aforementioned above, rising oil prices have affected the growth of these funds.
In the distant past, rulers of kingdoms would open their palaces to the public and take a bride from among their vassals as a gesture to earn the public's support for governing them. Recently, the GCC region has been reaching out to the global market in a 21st century version of this antiquated gesture, by buying stakes of other countries' well-known companies. For instance, in early 2008, AIDA invested $7.5 billion and got 4.9% of shares of Citigroup. After this investment, Standard Chartered invited AIDA to purchase shares, but the transaction eventually did not take place. In a similar move, Kuwait Investment Authority (KIA) invested $6 billion cash and bought about 6% of Citigroup and bought 7% of Daimler AG. In addition, Qatar Investment Authority invested £1.8 billion via buying stakes in June 2008.10 There are other examples that may be added to the list of these kinds of direct investment. The main objective of foreign direct investment is to reduce the volatility of commodity prices (oil, gas, and etc.) on government revenues. Furthermore, they are often precautionary measures against a future which may hold days where their valuable commodities run out and those "rainy days" appear more frequently. Unfortunately, due to the fact that SWFs do not publish data about their investment strategies, assets, or liabilities, we do not know a lot about them. The only way we can gauge their transparency is through the Linaburg-Maduell Transparency Index, which was developed by the Sovereign Wealth Fund Institute. According to this index, fund rating scores range from 1,to 10, where 1 indicates the least amount of transparency. 11
One of the most dire periods in US history, if not the darkest, was the 1929 Great Depression, where the US suffered heavily due to the credit crunch. The most pivotal and longstanding investment banks went bankrupt or were bought-out by other financial institutions. This left the finance sector having to bear the burden of the liquidity problem. Due to the fact that asset-backed-securities, credit-default-swaps and credit-default-obligations, or broadly "creative derivative instruments", feed into the liquidity problem, we cannot say which countries hold these assets in their balance sheet. However, there is a fact that these instruments definitely exist in European and Asian countries. Thus, it would be no surprise when these countries would have to confront a liquidity problem. These facts highlight the significance of the GCC countries which give an oil revenue surplus. Speaking to foreign investors in the U.S.-United Arab Emirates Business Council in June 2008, U.S. Treasury Secretary Henry Paulson gave credence to this point by emphasizing that the US is open to foreign direct investment. Paulson said "As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds. We reject measures that would isolate us from the world economy"12
While such words are proof of the faith invested in the possibilities of liberal trade, some politicians and economists have fears about the associated potential threats to national security and how business is conducted at home. In a 2007 meeting of G7 countries, the Chancellor of the Exchequer, Alistair Darling, stated that SWFs need to play by the rules and "When a company is not acting in a commercial way or we have reason to believe it is going to make an investment where there is an issue of national security, then we have powers to take action".13 Indeed, Darling is not the only one who has doubts about SWFs. In the same meeting, French President Nicolas Sarkozy, said: "We have decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes that do not meet the transparency criteria one is entitled to expect in a civilized world. It's unacceptable and we have decided not to accept it." The Western reflex to respond with suspicion towards foreign investment is owed mostly to the lack of fully institutionalized processes in place to govern their transparency and the host of unknowns that accompany such a potential investment, such as what is the motivation of the courting investors to invest in their country? Added to this are the protests voiced by nationalist groups for these funds making money for their own citizens. But given the reality of the global economic crisis, it would be hard to find anyone to challenge the argument that the finance world does not have time to stop and defend itself to nationalistic clamor these days-after all, the economic crisis does not appear to be discriminating based on nationality or state borders. SWFs assist governments to stabilize their markets and also demonstrate to future investors that they can offer a safe and investor-friendly environment. Moreover, these funds bring pros regarding the inflation problem that GCC countries have had to deal with recently.

Inflation Boom in the Region
After the global economy hiked up in terms of growth from the beginning of 2000, inflation rates around the world have shown an inclination to go up because of the credit crunch and fears of a recession in developed economies. We have seen the damaging effect of this trend on the GCC region over the last few years. There are some distinctive reasons behind rising prices in the region. Since all GCC countries have pegged their currencies to the US dollar and the dollar has depreciated against other currencies, this has led producers to raise the price of their supply. Besides, pegging the national currency to the US dollar paves the path for a willy-nilly tendency to avoid implementing monetary policies to control interest rates and money supply effectively. The other reason is that although the GCC region is abundant in terms of natural resources, the same cannot be said for cultivatable lands. According to the Gulf Research Center (GRC), in the UAE, arable area forms only 1 percent of all total land. This image very closely resembles of the situation in all other member countries as well. To overcome this problem, GCC countries are searching for overseas investment in Turkey, the Sudan, Vietnam and Cambodia to sustain their national food stock in the future. This is long term solution to cope with inflation. In the short term, governments provide subsidiaries to the private sector not to not hike up prices. Furthermore, governments raise state salaries about 15 percent to erase the effect of inflation. Nevertheless, these solutions cannot be permanent solutions to ease and get an effective grip on inflation levels. Yet another hefty reason is the liquidity problem. Since too much money chases a little supply of goods and services, people are forced to pay more than their value. 14
Aforementioned above, the GCC countries are eager to establish a monetary union and move towards a single currency in 2010. However, according to the Dubai Chamber of Commerce and Industry (DCCI), high levels of inflation substantially threaten the dream of the monetary union and single currency. The criteria to form a monetary union and single currency maintains that inflation should not exceed more than 2%--a percentage far below current inflation levels. Bahrain has the lowest inflation level of the six members, but even this was at 3% last year; and Qatar has the highest level of inflation at 14% last year. If the vision to form a monetary union stands a chance at all, then all members should stop pegging their currencies to the US dollar and start using monetary policies more effectively.15
The sun is likely to shine on in the GCC region, as it will likely continue to be very precious in terms of the liquidity issue-assuming that commodity prices will stay high. This is also significant for the rest of the world if sustaining stability is a common goal, as it should be, if the future of the region is to resemble the Fertile Gulf scenario. However, the GCC should deal with its crippling inflation more seriously to spark improvements in its socio-economic conditions. Combined, this prescription would empower the GCC to make progress on the goal of forming a monetary union.
www.gcc-sg.org
http://ec.europa.eu/external_relations/gulf_cooperation/intro/index.htm
http://news.bbc.co.uk/1/hi/world/middle_east/country_profiles/4155001.stm
www.tim.org.tr
http://www.weforum.org/en/initiatives/Scenarios/GCCScenarios/index.htm
OPEC, World Oil Outlook, 2008
OPEC, Annual Statistical Bulletin, 2007
Sovereign Wealth Fund Institute,http://swfinstitute.org, "What is a SWF?" page
Oxford Economics, Economic Outlook, "The Economic Significance of Sovereign Wealth Funds", January 2008
Financial Times, "Barclays seeks to put investors' minds at ease, 26 June 2008>
Sovereign Wealth Fund Institute, http://swfinstitute.org, "Search&Statistics" page
http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/02/afx5068548.htm
Sunday Times, "Rising power of the sovereign funds", 28 October 2007, Business p4
Gulf Business, "Price Shock", Page 76, September 2008
Arabian Business, "Inflation Threatens to Derail Monetary Union", February 2008

H. Gursah Pektas was graduated from Middle East Technical University Business Administration Department in 2007. After his graduation, he moved to Bahrain to work in an investment bank and still he is working in Bahrain.