June 7, 2011Who would benefit from an enlarged GCC union?
The six-state Gulf Cooperation Council (GCC) has invited Jordan and Morocco to join its ranks, in the wake of the Arab uprisings across the region. While the political motive is clear, what would such a move mean for the economies of the eight nations?
The political motive behind the GCC's surprise move to invite new members, in the form of Jordan and Morocco, is clear: in the wake of the Arab uprisings, the six Gulf nations - Saudi Arabia, Kuwait, Bahrain, UAE, Oman and Qatar - known as the "Kings' Club" are keen to recruit countries run by similarly autocratic monarchies, to strengthen their alliance.
Enlargement would bring GCC nominal GDP above $1 trillion
The economic consequences of such an upheaval are less immediately apparent, although a recent report from Banque Saudi Fransi said that the integration of two oil-importing countries into the energy-rich bloc would trigger considerable economic implications for the GCC. "Full integration of Jordan and Morocco into the GCC economic area would add 12.2% to the bloc's nominal GDP, based on 2010 data, bringing it solidly above the $1trillion mark," said John Sfakianakis, the bank's chief economist and author of the report.
"It's not necessarily a bad thing for the existing GCC members," says Said Hirsh, Middle East Economist with Capital Economics. "Jordan and Morocco won't necessarily cost a lot of money, and their needs financially, especially Jordan, are very small by GCC standards.
"On the other side of the fence, for Jordan and Morocco it might be good from an immediate budget perspective, but in the medium and long-term it could be bad from an economic reform perspective," he adds.
The Jordanian government was quick to welcome the prospect of joining the GCC, and King Abdullah II said it would help to boost historic ties with Arab monarchies. "This step would further enhance historical ties and cooperation between Jordan and the Gulf Arab states," he said. "The GCC advocates economic cooperation, which can be good for Jordan," added Information Minister Taher Adwan. "Jordan is facing an unemployment problem, a heavy bill for oil and gas and this membership brings hope."
Jordan to see short-term boost from GCC membership
"It wouldn't surprise me if Jordan joins, because the government there is completely focused on short-term political problems at the moment," says Hirsh at Capital Economics. "Joining the GCC might help solve those problems, although of course there would be opposition both inside Jordan and inside the GCC, to them joining."
The Jordanian economy was worth $27.5bn in 2010, is smaller than that of Oman and about a fifteenth of the size of Saudi Arabia's. As a consequence, and as long as any opposition to the move is quelled, Jordan would be much easier for the GCC to absorb. It is also a better geographic fit than Morocco, as it shares a border with Saudi Arabia's northwest edge.
"Jordan is likely to be enthusiastic given its proximity and cultural ties," notes Mark McFarland, emerging markets economist at Emirates NBD. Nevertheless, analysts fear a union with the GCC could have negative implications for the country's economic reforms, which have seen it take notable strides since the First Gulf War.
"After 1990, as Saudi and other countries stopped giving aid, a lot of workers came home and Jordan was forced to introduce economic reforms, especially from a budgetary perspective and a fiscal perspective," says Hirsh.
"That is why Jordan is where it is today, because of better economic management.
"Joining the GCC would mean more aid, but if it goes back to relying on the Gulf for aid to fund its economy, I think it will reverse any kind of economic reforms that it has enacted," he continues. "It will start subsidising government jobs and going back on privatisation, in order to reduce the political risks it faces."
Morocco looks at Maghreb union
Meanwhile, Morocco's economy was valued at $103.5bn in 2010, not far below Qatar and Kuwait, and the invitation received a more guarded reception in Rabat. Although Morocco welcomed the offer with "great interest", it stressed its commitment to forming the Arab Maghreb Union, a proposed economic integration of the five North African countries - Morocco, Algeria, Libya, Mauritania, and Tunisia.
"Morocco has a much closer relationship with Europe than it does with the other Arab countries, and the Moroccans were probably as surprised as everybody else when they were asked to join," says Hirsh. "The reaction from the government was one of surprise, because first of all they had never asked to join the GCC. Morocco has not relied on aid as Jordan has, and while it has a lot of problems, its direction has been towards reform and closer relationships with Europe.
"I don't see great economic benefits to Morocco, of joining the GCC, and if you want to invest in Morocco as a GCC company it's been open for many years - it's nothing new," he continues. "Other than forming a stronger political alliance with the Gulf, joining the GCC would not see Morocco getting a flood of investment all of a sudden. Jordan seems to be keen on joining so I wouldn't be surprised if that happened soon, but I would be very surprised if Morocco joined."
Long-term economic integration issues
In the event that either or both invitees accept the proposal to join the GCC, there will still be significant hurdles to face in order to build an effective economic union - some of which existing members have themselves failed to overcome thus far. "If the new members are part of the GCC Common market it would be for the better - to be part of a free trade zone would be very positive," says McFarland at Emirates NBD.
"However, we are talking about very long-term progression," he continues. "The issues over monetary union certainly haven't been resolved and that won't happen any time soon, the free trade zone really refers to industrial and manufacturing rather than services, and there are ongoing visa and travel issues that need resolving. There are many things that need to be made better."
"There are still economic integration issues between the six existing GCC countries - the customs union, freedom of investment and labour, and other problems," agrees Hirsh. "So even if Jordan does join it won't be like joining the European Union, where doors open and unemployment problems are reduced. The GCC is fundamentally a political bloc rather than an economic bloc."
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