Institutional Convergence and Economic Cooperation in the GCC: Evidence from Kuwait-UAE Bilateral Trade and Financial Integration Online First

Abstract

Kuwait and the UAE together account for USD 697 billion in combined GDP and represent the second-largest bilateral economic relationship within the Gulf Cooperation Council. Both are member states of the Organisation of Islamic Cooperation. This paper investigates how governance convergence drives economic integration between Kuwait and UAE through two complementary channels. The primary channel is a PPML structural gravity model estimated on a multi-country GCC panel (N = 8,892), which establishes that one-standard-deviation improvement in bilateral governance convergence raises bilateral trade by 15.9%, with counterfactual welfare gains of 2.84% of GDP for Kuwait and 1.63% for the UAE from full institutional convergence. A threshold analysis identifies a governance distance of 0.284 SD below which these trade effects amplify approximately threefold — a threshold the Kuwait-UAE pair has already crossed. The complementary channel is a DCC-GARCH model of weekly equity returns providing directional evidence that governance convergence raises bilateral capital market co-movement. A novel bilateral Islamic finance distance measure (IFDIST), constructed from IFSB-published capital adequacy differentials, constitutes an independent integration barrier in both channels. Policy priorities are Islamic finance supervisory harmonisation and capital markets passporting, with estimated annual welfare values of USD 862 million and USD 512 million respectively.

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