Front Matter Page
Institute for Capacity Development and Middle East and Central Asia Department
Contents
EXECUTIVE SUMMARY
INTRODUCTION
THE CASE FOR ECONOMIC DIVERSIFICATION IN THE GCC
DIVERSIFICATION IN THE GCC: PROGRESS SO FAR
POLICIES TO SUPPORT DIVERSIFICATION IN THE GCC
A MISSING LINK—CHANGING THE INCENTIVES OF FIRMS AND WORKERS
CONCLUSIONS AND POLICY RECOMMENDATIONS
REFERENCES
BOXES
1. The Role of Economic Diversification and Export Quality Upgrading in Sustaining Economic Growth
2. Economic Diversification in National Development Plans in the GCC
3. Dubai’s Road to Growth and Diversification
4. Financial and Fiscal Diversification in the GCC
5. Experiences with Diversification in Oil-Exporting Countries
FIGURES
1. GCC: Economic Structure
2. GCC: Improvement in Human and Social Development Indicators
3. Weaknesses in the GCC Growth Model
4. Real GDP in the GCC, 2001–13
5. GCC Exports: Trends in Non-oil Exports and Diversification
6. GCC Exports: Share of Manufactures and Trends in Export Product Diversification and Export Quality
7. Export Quality Ladders across the GCC
8. Macroeconomic Stability and Policies
9. Research and Development Expenditures, 2000–09
10. Nominal GDP, by Income Approach
11. Education and School Enrollment
12. Monopoly-Related Indicators
13. Services Trade Restrictions Index
Executive Summary
The Gulf Cooperation Council (GCC) growth model has delivered strong economic and social outcomes over several decades. GCC economies rely on oil as the main source of export and fiscal revenues. Over the years, GCC governments have increased public sector employment and spending on infrastructure, health, and education. This has helped raise standards of living and support private sector activity, particularly in the nontradables sector.
The current growth model has weaknesses, however, and increasing economic diversification is paramount. Greater diversification would reduce exposure to volatility and uncertainty in the global oil market, help create private sector jobs, increase productivity and sustainable growth, and establish the non-oil economy that will be needed in the future when oil revenues start to dwindle.
A number of policies have been adopted to diversify the GCC economies and reduce their reliance on oil. A stable, low-inflation economic environment has been achieved, the business climate has been strengthened, education has been expanded, trade and foreign direct investment (FDI) has been liberalized, and the financial sector deepened. National development plans are being implemented with a view toward boosting the human capital of nationals, and developing new industries and services that can employ high-skilled labor. Nevertheless, to date these diversification strategies have yielded mix results. The share of non-hydrocarbons output in GDP has increased steadily but is highly correlated with oil prices, and progress with export diversification, a key ingredient to sustainable growth, has been more limited.
International experience shows that diversifying away from oil is very difficult. Success or failure appears to depend on the implementation of appropriate policies ahead of the decline in oil revenues. Malaysia, Indonesia, and Mexico perhaps offer the best examples of countries that have been able to diversify away from oil, while Chile has had some success in diversification away from copper. In addition to creating a favorable economic and business environment, these countries focused on export diversification and quality upgrading by encouraging firms to develop export markets and by supporting workers in acquiring the relevant skills and education to boost productivity.
Going forward, diversification in the GCC will require realigning incentives for firms and workers. At present, the distribution of oil revenues within the economy crowds out non-oil tradables production. Producing nontradables is less risky and more profitable for firms because they can benefit from the rapid growth in government spending, while the easy availability of low-skilled, low-wage foreign labor has helped extract larger rents. The continued availability of public sector jobs discourages nationals from pursuing entrepreneurship and private sector employment. In addition to measures that improve the business environment, there is a need to fundamentally alter these incentives—to fill a “missing link” in current policies. Measures could include reorienting public spending, strengthening the role of private sector competition, developing backward and forward linkages across sectors with a comparative advantage, and implementing labor market reforms to incentivize private sector employment of nationals and improvements in productivity.