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East-East opportunity

Dr N Janardhan
Filed on March 10, 2007

AT A time when the Gulf Cooperation Council (GCC) countries are attempting multi-dimensional changes that bear the potential to transform the region and Asia is experiencing a renaissance, there exists an opportunity for synergy to accomplish optimum mutual benefits even beyond the economic realm.

While the GCC-Asia interface boasts of a vibrant historic past, the interaction suffered during the reign of colonial powers. In the recent past, however, several regional and international events have given scope for the reestablishment of the old bonhomie.

The new age of "Arab-Asian cooperation" and "East-East opportunity" is evident in the Singapore-inspired Asia-Middle East Dialogue, which was first held in Singapore in 2005. The next intergovernmental meeting is scheduled to be held in Cairo later this year and in Bangkok thereafter.

At the first meeting, Singapore's Senior Minister Goh Chok Tong said, "Relations between the Middle East and the West have been historically difficult. But there are no deep historical, cultural, religious or ideological barriers preventing better relations between the Middle East and Asia...On the contrary, the links between our regions are ancient; the historical influences on each other profound. It was only in the last century or so, with colonialism and the Cold War, that we neglected each other. But the ancient links are now being re-established…It is in our interest that the Middle East develops and prospers. It is in the interest of Middle East countries to plug into the Asian grid."

Economic factors are bound to remain the bulwark of the emerging relationship with GCC-Asia trade figures nearly tripling in the last five years. The energy resources from the region are vital for the fast-growing Asian markets. The resultant capital is scouting for investment prospects that guarantee higher returns than in the West, which is becoming available in Asia's push for infrastructure.

Asia consumes about 23 million barrels per day (mbpd), which is 30 per cent of the world's demand. World oil demand is estimated to increase by 47 per cent between 2003 and 2030, with just China and India accounting for 43 per cent of the rise. Asia's consumption is expected to reach 39 mbpd by 2025, a growth of over 50 per cent of the total increase in global demand. Asia currently imports around 16 mbpd (with 12 mbpd coming from the GCC countries), which could double to 32 mbpd by 2025. Given the developments in the Gulf gas industry, the 'fuel of the future' will open a new front for cooperation and business with Asia.

China currently imports 32 per cent of its oil, about half of it going from the region. But this is likely to double by the end of the decade. China's gas consumption is rising at an even faster pace, with imports projected to increase from zero in 2000 to 20-25 million cubic meters by 2010. China has adopted a strategy of diversification by investing in oil/gas fields in more than 20 countries around the world. During 2006-2010, Guangdong Province is expected to invest $22.3 billion to build five petrochemical bases. Additionally, five refining expansion and new refining projects, five ethylene projects and some downstream chemical projects are on the anvil with the assistance of foreign companies.

Further, China will account for 19 per cent of the world GDP by 2050, which is equal to that of the US, Europe and Japan combined; and India will be just behind at 18 per cent, which is great news for the Gulf countries in terms of opportunities.

The potential of the GCC economies is also immense. Their combined trade surplus during 2005-07 will be larger than that of China and Japan – they will generate a current account surplus of $585 billion from the sale of oil between 2005 and 2007 that will be larger than China's $521 billion and Japan's $437 billion (current account surplus is expected to remain unless crude oil prices fall to $31 a barrel, which appears improbable). The GCC countries accumulated foreign assets worth $167 billion in 2005, taking the total for the past six years to over $400 billion. It is estimated that Gulf petrodollars are set to purchase $450 billion of foreign assets in 2006-07. Most importantly, Gulf investors are tipped to shift their portfolio allocation toward Asia by 10 to 30 per cent, which translates into about $250 billion being available for investment in Asia over the next five years.

During 2007, the Gulf and Middle East buyers are expected to snap up some $20-30 billion in Asian assets, with a focus on real estate and industrial companies. This assessment seems realistic because the region accounted for less than one per cent of the $1.5 trillion foreign direct investment in American businesses and real estate in 2006. Instead, China and India are likely to become the most important markets for GCC investments. The two countries are expected to overtake the traditional markets for Gulf investment in Europe and the US within a decade, if current trends continue.

Indicating that plans are already being translated into action, for example, state-owned Kuwait Investment Authority (KIA) is considering stakes in Chinese financial firms and infrastructure projects in India and Pakistan as part of a push to double its investments in Asia. The KIA, with assets worth an estimated $100 billion, decided in 2005 to increase the Asian share of its portfolio from 10 to 20 per cent. Some UAE-based companies like Emaar have invested over $20 billion in Pakistan's real estate sector, and Dubai Ports World, $10 billion. Emaar has also entered into a $43-billion joint deal with Port Qasim Authority to develop two island projects near Karachi over 13 years.

It is worth watching how the vision of the GCC countries to use Singapore as a hub to explore investment opportunities in Asia will unfold in the future. Malaysia too is acquiring importance among the GCC countries because it is being viewed as a successful model of a modern Islamic state. Championing the view that Islam and modernity are not mutually exclusive, Malaysia is now calling for strengthening trade and economic links among Muslim countries in order to benefit from the globalisation process and to move into the mainstream of the global economy. Malaysia has every right to make that call because its prescription is borne out by its own success in achieving prosperity by promoting a knowledge-based economy.

Beyond economy, the partnership with Asia serves as a platform for the GCC countries to convey their determination to break the conservative stereotype attached to them in the international milieu and showcase their new relentless march on the path of reform and progress to become an integral part of the globalised world.

However, the 'rediscovery' of interest in each other and plans to build a new outlook could be sluggish because of some intrinsic differences on both sides. Notwithstanding the historic ties between the GCC countries and Asia, which have been sustained by the current oil, trade and expatriate dynamics, the way forward for a robust bilateral relationship rests on developing a paradigm that hinges on strategic political, economic and security dimensions. With several factors contributing to the rediscovery of the GCC-Asia relationship, it is time to convert this 'opportunity' into a long-term 'strategy'.

Dr. N. Janardhan is the Program Manager of Gulf-Asia Relations, and the Editor of the 'Gulf in the Media' at the Gulf Research Center in Dubai




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