IMF Survey : Gulf Economies Should Diversify to Sustain Strong Future Growth
IMF News, June 3, 2014
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Bibliographic details
- Published: June 3, 2014
Conference overview
- High-level conference titled “Economic Development, Diversification, and the Role of the State” held in Kuwait City during April 30-May 1 and co-hosted by the International Monetary Fund (IMF) and Kuwait’s Ministry of Finance.
- Participants: international experts, high-level policymakers from the region, and renowned academics.
- Region covered: GCC—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.
Key findings on the prevailing growth model
- The oil-based growth model led to rapid improvements in human development indicators but produced a decline in relative economic performance.
- Main features of the current growth model:
- reliance on oil as the main source of export and fiscal revenues,
- dependence of the private sector on low-wage expatriate labor,
- concentration of economic activity in the low skilled non-tradable sector.
- The current model has not yet produced viable tradable sectors and diversified economies.
- A key challenge: generate jobs in the private sector for the rapidly growing young population.
- Assessment from conference participants on long-term reliance on oil revenues: “probably not.”
Evidence and rationale for diversification
- Diversification away from oil and other extractive industries could yield:
- higher long-term growth,
- more jobs for the young and growing populations,
- less dependence on returns from sovereign wealth funds,
- better environmental conditions.
- Empirical point: growth and diversification are positively correlated; diversified economies are less likely to experience economic volatility.
- A diversified economic base can secure stable revenues for government spending on public services and infrastructure, reduce poverty, and generate equitable growth.
Assessment of ongoing diversification efforts
- Example successes and initiatives:
- United Arab Emirates: modern infrastructure, major airports and seaport, world-class hotels, business-friendly environment — cited as a successful diversification story.
- Saudi Arabia: development of economic cities.
- Qatar: targeting airline logistics.
- Bahrain: targeting aluminum industry.
- Kuwait and Oman: promoting entrepreneurship through small and medium enterprises.
- Limitations noted:
- Policies would be more effective if underlying economic incentives for the private sector were changed.
- Dubai example: “Dubai has become a logistics and transportation hub, but there are no gains in productivity as the focus was on low-productivity sectors.”
- High share of nationals employed in the public sector leads to insufficient engagement of nationals in the private sector and distorts education and employment incentives.
Incentive structure and the role of the state
- Oil revenue distribution affects incentives:
- Public sector wages and benefits often make public employment more attractive, especially for lower-skilled workers.
- Firms face higher profitability producing for domestic market using low-wage foreign labor than entering export markets.
- Policy advice emphasized:
- Ensure economic incentives encourage private sector employment and export-seeking by firms.
- Implement structural reforms, improve institutions and the business environment, invest in infrastructure, and reduce regulations—but note these may be insufficient without incentive changes.
- Role of the state as articulated by Muhammad Al-Jasser: “the role of the state should be as a growth facilitator rather than an employer of last resort. It should provide infrastructure, regulations, and incentives while ensuring that the heath care and education systems are improving and the skill sets of the population are developing.”
Education, skills, and productivity
- Improving education quality is paramount to equip workers for private sector jobs.
- Problems highlighted: high illiteracy rates in some cases, poor performance in math and science, and “diplomatitis” (studying for diplomas and social status rather than usable knowledge).
- Successful country experiences (Korea, Malaysia) emphasize the role of education and science in diversification.
- Need to correct mismatches between curricula and private sector skill demands; strengthen vocational training to enhance technical skills.
- Philippe Aghion on productivity: “Productivity growth is fostered by better school performance, which hinges on a combination of teacher quality and efficient tutorship, and good synergy between central and local levels.”
Competition, entrepreneurship, and lessons from other countries
- Encouraging competition and entrepreneurship is critical for diversification.
- Lessons from Korea, Indonesia, Malaysia, and Singapore:
- Focus on competition in international markets and technological upgrades.
- Malaysia preserved competitiveness via horizontal shifts to manufacturing, vertical shifts downstream, macroeconomic stability (low inflation), and productivity growth that exceeded wage growth.
- Diversifying oil-exporting economies is difficult and evidence suggests it can take decades before full diversification takes hold.
Policy implications and priorities (conference consensus)
- Change economic incentives to:
- encourage nationals to work in the private sector,
- encourage firms to pursue export opportunities.
- Implement structural reforms and improve institutions and the business environment.
- Invest in education reforms and vocational training to align skills with private sector needs.
- Promote competition and entrepreneurship to climb the value added ladder.
- Reorient state role toward facilitation: provide infrastructure, regulations, incentives, and improve health care and education.
IMF Survey : Gulf Economies Should Diversify to Sustain Strong Future Growth — IMF, June 3, 2014.