Though so far elusive, the GCC membership Yemen aspires
to would certainly give the country an economic boost,
putting it in the mindset of investors and vastly improving
the prospects for non-oil growth.
The term 'poor relation' could have been invented for Yemen, a structurally weak economy with only negligible oil reserves, gazing from the rough end of town at the elite club to the north.
The GCC membership it aspires to would certainly give it an economic boost, putting it on the radar of investors and vastly improving the prospects for non-oil growth.
However, like the proverbial poor cousin, Yemen has been studiously ignored by its wealthy relatives in the past, with the odd outspoken comment suggesting the true feelings that lie behind the neighbourly courtesy.
Saudi Interior Minister Prince Nayef bin Abdulaziz said in 2004: "We refuse to have Yemen join the Gulf Cooperation Council. (It) is not a Gulf state."
Notwithstanding such comments, and assuming that the GCC governments will see reasons to preserve some stability to the south, there remains some hope of membership.
In theory, like some of the former Soviet states that were once the poor relations of the EU, and now sit proudly among the ranks of the founder members in Brussels, Yemen could work its way up to eventual accession to the GCC.
It would take a process of stringent economic reform, a demolition of deterrents in the business environment (of which there are many) and a painful process of fiscal consolidation and debt reduction. But it is possible.
Steps taken
The GCC has already started to take note of the importance of maintaining stability in its southern neighbour: steps have been taken to admit Yemen to the council of ministers of education, health and social affairs and even the Gulf Football Cup.
Moreover, Yemen's deputy Prime Minister for Economic Affairs and Minister of Planning and International Cooperation Abdulkarim Al Arhabi recently announced the establishment of "a common committee represented by Yemen and the General Secretariat of the GCC to discuss integration issues".
All good signs.
Still, things are rarely simple where decision-making in the GCC is concerned, and this is a particularly hard question. The advantage of the make-up of the GCC as it stands currently is that the six economies are all broadly similar.
Far more similar, in fact, than those of the eurozone. Trade profiles, basic economic structures, fiscal policies and currencies are all broadly in line.
While some economies are significantly more diversified than others, and some significantly wealthier in per capita terms, all respond to macroeconomic phenomena in a predictably similar way.
The introduction of Yemen to this equation would certainly complicate matters. The political stability prized by investors north of the border is frequently absent, and attempts at oil exploration have been disappointing.
While its economic diversity is, by necessity, better than that of its neighbours - agriculture accounts for 13 per cent of GDP in 2005 and services 32 per cent - the economy as a whole is far smaller.
Per capita GDP amounted to just $1,000 in 2006, according to the CIA World Factbook, dwarfed by Saudi Arabia's $13,800, let alone Qatar's $29,800.
True, the macroeconomic indicators at the moment do not suggest too great a discrepancy: with oil prices at more than $90 a barrel, even the smallest of oil producers are sitting pretty.
Yemen saw real GDP growth of 5.2 per cent last year, and recorded a current account surplus of $633 million in 2005 (around four per cent of GDP). However, in a telling warning sign, the surplus actually dropped in 2006.
In a year when oil prices rose by over 20 per cent, Yemeni crude revenues grew by just 13 per cent, indicating a drop in the volume of oil available for export.
At the same time, though, Yemeni consumers, prompted in part by generous government outlays, continued to spend like their rich neighbours, and the import bill rose by 26 per cent.
The current account looks certain to go into deficit in the next few years, even with oil prices still robust (the IMF is pricing in an Opec basket price at or above $64 a barrel up to 2012, yet still sees the account falling into the red).
Inflationary threat
Even if Yemen could gain entry to the GCC, then, currency union looks a very tall order. The riyal has been gradually depreciating since 1998, and the current policy appears to be to allow the unit to continue its orderly decline, in order to acclimatise to the shift from surplus to deficit, as oil exports diminish and (eventually) prices fall.
Against the backdrop of the current dollar weakness, this is a very serious inflationary threat (of course, the advantage of being the poor cousin is that your problems do not make the headlines: few newspapers picked up on the fact that the Yemeni CPI rose to 30 per cent year-on-year in mid-2006).
However, the problem seems to be coming under control now - almost miraculously so, if the official figures are to be believed - and the depreciation policy seems the most sensible in the light of the inevitable decline going forward.
Would the six GCC states be prepared to do what West Germany did in 1990, effectively devaluing their own currencies in order to let the Yemeni riyal catch up? Hardly. Even at current levels, the weakness of the GCC currencies is causing major inflationary concerns, and the talk is of revaluation. Devaluation would be inflationary suicide.
Currency alignment
Admittedly, any currency alignment will not take place for some time - even the planned GCC union does not look likely to happen before 2012, while the potential admission of Yemen will take several more years on top of that.
By this point, the economic climate may have changed to the point where the GCC governments are once again thinking in terms of weak currencies, perhaps because diversification into non-oil exports has become an even more urgent priority.
However, the idea of the six mighty GCC states bowing the needs of minnow Yemen in their currency policy is politically unthinkable.
If it is to join in the union, it will have to haul itself up every inch of the way, as the former Soviet and Balkan states have done in Europe, paradoxically by attracting the FDI inflows it seeks from membership.
This is not impossible. Turkey too was once a poor cousin, arguably differing from the EU (and posing more of a threat to the stability of the bloc) even more than Yemen does from the GCC states.
Yet while it remains some distance from EU membership - some say it will never happen - it is attracting huge volumes of investment, both FDI and portfolio, on the back of the very aspiration.
If the GCC were to set a specific, achievable framework with which Yemen could work towards membership, investors, ever searching for the newest frontiers in emerging markets, would surely sit up and take notice. One big if, yes. But it is an investment that will cost the GCC very little to make, and may turn out to be one of the most politically crucial.
The writer is Middle East analyst, Business Monitor International.
