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Welcome to the club

By John Butcher
November 2011

The Gulf Cooporation Council has extended invitations to Jordan and Morocco to become a part of the organisation. Membership could strengthen the GCC and the invitees, but is also fraught with potential difficulties according to a report produced by Credit Agricole's chief economist John Sfakianakis and economic analyst Daliah Merzaban
Formed in 1981, the Gulf Cooperation Council has remained a solid and unchanging bloc that has slowly evolved towards greater cooperation, economically, politically and militarily. The exclusive club of oil rich states has previously knocked back attempts by other countries to gain membership as it has pursued integration with the eventual goal of a shared currency. So it was met with surprise on May 10 this year, when invitations were extended to Jordan and Morocco to become a part of it.

The main motive behind the invitation was clearly a political one, driven by the Arab Spring and growing Iranian influence across the region, according to observers. The six countries that comprise the GCC - Saudi Arabia, Kuwait, Bahrain, UAE, Oman and Qatar - are all autocratic regimes that feel threatened by the sudden desire for democracy that has accompanied uprisings in the region. The addition of Jordan and Morocco to the club would add another two autocratic regimes to its membership and strengthen their alliance significantly.

The growing influence of Iran across the MENA region is a strong driving force behind the move. Iran's reaction to the invitation, which its leaders called a bribe to save rotten monarchical regimes, adds weight to this argument. Iran has flexed its muscles in the region recently in Lebanon, where it backs Hezbollah, and in Bahrain, where it has helped to ferment unrest among the largely Shiite population against the ruling Sunni monarchy. Bahrain benefited from its GCC member status when Saudi Arabia and other members of the council sent in troops to quell protests.

According to Credit Agricole, which has produced a report into the proposed GCC expansion, the member states see the inclusion of Jordan and Morocco as a way of strengthening the club against future threats by the creation of a "new axis of geo-political influence in the Middle East." The move would add strength to the GCC's political presence and global influence, provide it with Jordan's security and military expertise and build on its common political objectives with Morocco.

While politics is at the root of the invitation, the economic implications of two oil-importing states coming into the energy-rich bloc would also be immense. The GCC countries form the world's largest oil-exporting region, and are moving towards closer ties in terms of foreign policy objectives and labour mobility, among other areas.

Whether Jordan and Morocco would be offered full membership of the GCC club or a watered down version designed to strengthen political and military objectives is unclear. But no matter how far integration goes, the differences between them and the existing GCC countries are huge, and could create problems as well as new opportunities.

The differences between the two invitees and the existing GCC club members are quite stark, according to Credit Agricole. Neither Jordan nor Morocco has substantial oil wealth and as such they are both significantly more economically diversified than the GCC countries. Both governments also face fiscal deficits this year, in large part due to the rising cost of energy, which has benefited the GCC states.

"Jordan's budget deficit stood at $1.5bn in 2010, or 5.4 percent of GDP including foreign grants, and is likely to widen this year; while Morocco also faces a growing deficit, particularly as investment flows and tourism in the region are hit this year due to the instability shaking a number of Arab states," says the report.

"Jordan's public debt stock stood at 62.7 percent of GDP in 2010 as the government sought to finance fiscal deficits. By contrast, most Gulf Arab states, bar Bahrain, have been posting solid budget surpluses, adding to their already rich foreign asset holdings."

Integrating two states so different to the rest of the GCC club could prove problematic and potentially derail long terms plans for establishing a common market with freedom of movement for labour, goods, capital and services and eventually monetary union.

According to Credit Agricole, "Current GCC states had fulfilled many of the preconditions for a currency union: they are mainly oil exporters, are very open to trade and imported labour, and have flexible labour markets. Their budget deficit and debt limit criteria are complementary, and they have already ratified a basic monetary union agreement and commenced operations of a monetary council, which forms the backbone of the central bank.

"Yet the monetary union has been derailed due to a lack of political will and introducing new players - with very different fiscal and monetary circumstances - could complicate the plan even more. The European Union sovereign debt crisis revealed the importance of centralising both monetary and fiscal policy to avoid breaches of budget deficit and debt limits that could potentially destabilise the bloc."

Demographics is another issue for integration. Adding Jordan and Morocco to the GCC would almost double its population to 82.9m compared with 45m in the current bloc. The relatively small indigenous population of most of the GCC members, except for Saudi Arabia, has made it easy for the countries to have porous borders, where nationals move around without the need for visas. Extending this to Jordan and Morocco could prove an issue given the numbers of people involved and Saudi Arabia's rules on visas for religious tourism for countries outside of the GCC. Jordan and Morocco are both Sunni-majority monarchies whose populations would be keen to take advantage of easier travel to Saudi Arabia's religious sites. Their inclusion would also see Saudi Arabia's share of the GCC population drop from 60 percent to 33 percent, and potentially weaken its influence within the bloc.

In addition, the sheer number of people having free movement would also add a new dynamic to local job markets. Around 2.5m Moroccans, equivalent to 20 percent of the country's total labour force, work abroad, mostly in Europe. And an estimated 600,000 Jordanians, mostly employed in the Gulf region, remit annually the equivalent of around nine percent of the country's GDP.

According to Credit Agricole, "Moroccans and Jordanians also earn comparatively less than Gulf Arab residents, which raises some considerations with regard to freedom of labour mobility. Per-capita GDP in Jordan was $4,499 in 2010, while in Morocco per capita income stood at $3,252 - both well below Saudi Arabia's per capita GDP of $16,041, the lowest among GCC countries.

"It is foreseeable then that GCC membership would increase the ease with which Jordanian and Moroccan professionals seek work in GCC nations. If they seek lower wages than other Gulf citizens, this could exacerbate rather than help unemployment in the Gulf."

While there would be significant economic and possibly social difficulties thrown up by giving Jordan and Morocco membership of the GCC, there would also be economic benefits, particularly for the invitees. Closer economic ties would help Jordan and Morocco improve their trade balances with the Gulf states, according to Credit Agricole, while providing greater diversification for imports into current bloc countries. At present, the trade balance largely favours the GCC. Jordan had a trade deficit of $2.6bn last year, while Morocco's trade deficit was $1.6bn.

"One feature of the GCC bloc is a customs union, including a cap on tariffs of imported goods within the bloc of five percent - a benefit that could be extended to a new member," the Credit Agricole report adds.

"Gulf trade activity with Jordan is already buoyant. In 2010, the Gulf countries accounted for 24.2 percent of Jordan's imports, while 18.4 percent of its exports were destined for the six GCC states. The anticipated rail link between Jordan and Saudi Arabia would be a boost to trade with the rest of the GCC."

Trade ties with Morocco are less well established, with 4.9 percent of its imports sourced from the Gulf in 2009, and just 0.5 percent of its exports being to the GCC members. GCC membership could prove a positive step for Morocco by opening up new markets for its agricultural goods.

"The desert states of the Gulf rely heavily on food imports, particularly as they seek ways to improve food security and phase out production of water-intensive crops. Food exports accounted for 21.4 percent of Morocco's exports in 2009," says Credit Agricole.

In 2009 Europe accounted for 60 percent of Morocco's imports and 70 percent of its exports. Closer ties with the GCC region could help it to break its reliance on Europe, and also provide an entry point for the GCC to enhance its relations with Europe.

Tourism links between Morocco and the GCC states could also improve. In 2009 just 2.7 percent of tourists who visited Morocco were from the Middle East, while 84 percent were from Europe.

In Jordan, tourist links are more strongly developed, in part because of geography. In 2010, according to data from the Jordanian Ministry of Tourism, Gulf countries accounted for 28.2 percent of tourists visiting Jordan, with Saudi Arabia alone accounting for 16.2 percent. Both countries could potentially benefit in this respect from stronger ties with the GCC and easier movement of people.

While the invitation of membership has been made, it remains to be seen whether this will develop into full membership, a pared down version, or in fact any form of membership at all. In the view of Credit Agricole, Jordan is more likely than Morocco to join the club. It is geographically closer to the GCC bloc, and has a smaller economy and population than Morocco, all factors that would make its integration easier. Jordan's economy was worth $27.5bn in 2010, making it smaller than Oman's and about a fifteenth the size of Saudi Arabia's, according to the report. Morocco's economy was worth $103.5bn last year, just below Qatar and Kuwait, and its inclusion in the GCC would lead to a sizeable adjustment in the bloc's economic structure.

If their membership goes ahead, it seems it will be mutually beneficial to both sides - the invitees and the existing members. For the current GCC club, it will strengthen its political and military power, adding extra protection against Iranian influence and democratic calls. For Jordan and Morocco it would potentially facilitate greater foreign direct investment, boost trade, commerce and labour mobilization as well as opening up new important avenues for trade.

© MENA Fund Review 2011