This post is based on an on-going joint research with Professor Won Joong from Kangwon University in South Korea. This is the second joint project on the GCC. Here are some preliminary results which will be revised as time permits.

This paper uses a structural VAR model with block exogeneity and identifying restrictions to examine three issues related to economic growth and inflation in the incumbent GCC members –Kuwait, Oman and Saudi Arabia, which are oil producers of varying prowess, and the aspirant country Jordan which is not an oil producer. The first issue is related to global macroeconomic linkages among the exchange rate, oil price, China’s producer price, U.S.’s export price, EU’s export price and Japan’s export price. The second concerns the relationships between the industrial production and consumer price indices of the selected incumbent GCC member countries and the aspiring member Jordan. The third issue is whether there is significant synchronization between the incumbent GCC members and the aspirant Jordan that would create a case for Jordan to join merely on economic grounds.

The results demonstrate that if the GCC members are to focus only on stabilizing inflation, then  there is no harm for them to accept Jordan as a new GCC member country. Jordan's and the GCC's CPIs respond similarly and positively to dollar depreciation and global price shocks. In response to the oil price shocks, most of the IP’s and CPI’s of GCC countries rise. Only the industrial production of Jordan, which is an oil importer, shows a negative response to the oil price shocks. The IP’s of Kuwait, Oman and Saudi Arabia rise by 2.1%, 0.5% and 2.2%, respectively, in the long-run. In response to the oil price shocks, the CPI’s of Jordan, Kuwait, Oman and Saudi Arabia rise by 1.0%, 0.1%, 0.3% and 0.3%, respectively, in the long-run.

On the other hand, if the GCC’s objective is not only focusing on the stabilization of inflation but also on business cycle synchronization, the GCC should take more cautious steps in accepting Jordan as a new member country. In response to the U.S. export price shocks, the industrial productions of GCC countries generally show insignificant responses  probably because the GCC currencies are effectively tied to the U.S. dollar. While the EU export price shock increases the IP’s of the oil-rich producer Kuwait and Saudi Arabia, it decreases the IP’s of the oil less Jordan and the minor oil producer Oman (Jordan's industrial production does not respond positively to the oil price shock while the GCC's industrial productiom  does because it's dominated by oil production. Given that Jordan is not an oil producing country, it would be difficult task to achieve business synchronization between GCC member countries and Jordan.

Given, however, that Jordan’s geography, language and culture conformity with other GCC countries, a closer tie can be achieved through enhanced labor mobility and workers’ remittance.

TO  BE CONTINUED