The High Level Of Openness And Labor Mobility

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Executive Summary The high level of openness and labor mobility are two of the essential criteria for a successful optimal currency area (OCA). EU and GCC countries are OCA in terms of openness because they have high economic openness level. Although the GCC has a low level of intra-regional trade, the fixed exchange rate regime still is the optimal due to the fact that the main export commodity is oil for GCC countries, they do not need to adjust the exchange rate between GCC countries due to their exchange rate fixed to the dollar which is the official currency of oil transaction. The EU is not OCA in terms of labor mobility because the labor movement is not free. However, currently GCC is an OCA in labor mobility aspect because…show more content…
When the demand transfer from country A to country B, because of the fixed exchange rate regime, country A will have a higher unemployment rate, and country B will suffer a higher inflation rate. If labor freely flows from A to B, it can eliminate the unemployment effect in country A and inflation effect in country B. These two countries will achieve internal balance and external balance in the meantime (McKinnon, 1863). The level of economic openness in European countries is high. The average openness is approximately 40% in EU member states (Mongelli, 2002), and there is an increasing trend in openness level over time (Table 1). This result shows that, in general, the import and export growth rate exceed the growth rate of GDP in EU12 countries during these years. It should be mentioned that, in Table 2, the intra-regional trade in the EU plays a significant role, it accounts for about 60% of the international trade (Laabas & Limam, 2002). The economy in the GCC countries is highly open, but with a low level of intra-regional trade. Countries with lowest openness levels in the GCC were Saudi Arabia and Kuwait, and their openness levels were 35% and 47% (Sturm & Siegfried, 2005) (Table 3). According to openness standards, the GCC countries should undoubtedly be a

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