Press Release: The IMF Middle East Center for Economics and Finance, Jointly with the Arab Fund for Economic and Social Development, held a Symposium that Discussed the Path to Economic Diversification in Kuwait and Other GCC Countries

May 16, 2016

Press Release No. 16/223
May 16, 2016

The IMF Middle East Center for Economics and Finance (CEF), jointly with the Arab Fund for Economic and Social Development (AFESD), held a symposium on “The Path to Economic Diversification in Kuwait and other GCC Countries” on Monday May 16, 2016. The event was hosted at the Arab Fund’s Headquarters. The panel discussion was moderated by the CEF’s Director Dr. Oussama Kanaan, and included Professor Ha-Joon Chang of Cambridge University, author of seminal work on the role of the state in economic development, and Dr. Reda Cherif and Dr. Fuad Hasanov, the leading IMF economists in the field of economic diversification.

CEF Director Oussama Kanaan indicated that the symposium is the fourth in the series of events organized by the CEF jointly with the AFESD aimed at stimulating discussion on economic policies for Kuwait and other GCC countries to ensure durable development on the basis of a long-term strategy to reduce the dependence on oil. He added that the adoption of a bold diversification strategy has become particularly important in the face of low oil prices, and a critical one to prevent a marked decline in GCC countries’ living standards. Drawing on international country experiences, the panel discussion brought to the fore the core ingredients of successful economic diversification strategies, including infrastructure and human capital investments conducive to private sector growth and the development of sophisticated non-oil export industries.

Dr. Cherif and Dr. Hasanov started by putting into perspective the implications of the decline in oil prices from above $100 to about $40 per barrel today, which has made diversification such a pressing policy issue. They noted that such a drastic and persistent decline is raising the specter of a return of the oil slump of the 1980s–1990s. Citizens and policymakers from many oil-exporting nations still remember the ordeal their countries went through at that time. The promise of easy and swift development brought by large oil revenues failed to materialize, resulting in unemployment, falling living standards, and heavy indebtedness in the 1980s and 1990s. History does not repeat itself, but it should not be ignored. Dealing with low oil prices in the current context of high government spending and rising expectations about the provision of jobs and income transfers is even more challenging.

Cherif and Hasanov indicated that, to achieve diversification, oil exporters must change the prevailing economic model. Despite the complex choices involved, it is paramount for oil-dependent economies to become innovative economies. They will have to experiment and learn from the experiences of other countries on their path to diversification. In the past, countries such as Brazil, Korea, Malaysia, and Singapore have made major strides in diversifying their economies, and their experiences carry important lessons for GCC countries today.

These countries’ experiences reveal that incentives for firms and workers need to be realigned to develop technologically sophisticated export-oriented industries. Standard growth policy prescriptions may not be sufficient to achieve true diversification. In addition to addressing government failures, policymakers must address market failures by changing incentives for firms and workers to move toward more dynamic sectors. Policymakers should focus on developing dynamic export markets. Diversification has to start somewhere and can begin by focusing on a more limited set of industries. Facilitating entrepreneurship is essential while education and social development are paramount. The choice to diversify via the service sector versus the manufacturing sector depends on the potential productivity gains. The frontier between services and manufacturing is fading, and there are more productivity gains to be had with service sectors that are more strongly linked to the manufacturing sector.

Professor Chang then discussed the key elements that characterized successful diversification strategies, and concluded with three main messages. First, diversification does not need to be related to economic activities that the country is already engaged in—the experience of several countries indicates that new activities are created that are often unrelated to a country’s traditional industries or its natural resource endowment. Second, even when diversification is related to a country’s traditional industries, the challenge is to ensure that the products of that industry become increasingly sophisticated, at more advanced stages of manufacturing. Third, diversification requires an industrial policy that is highly selective, taking into account the particular economic and social conditions of the country.

The floor was then open for discussion with the audience, whose interventions reflected a broad range of interests, including participants from the public sector, the banking and business community, academia and representatives from international and donor organizations.


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