{
  "title": "IMF Survey : Oil Price Drop Highlights Need for Diversity in Gulf Economies",
  "publication": "IMF News, December 23, 2014",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/socar122314a",
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  "summary": "Countries of the Gulf Cooperation Council will have to adjust the incentives of workers and firms to encourage them to work and produce in the non-oil tradable sector if these economies are to succeed in diversifying their economies, a new IMF study says.",
  "publishDate": "2014-12-23",
  "sections": [
    {
      "heading": "Overview and context",
      "content": "- Publication date: December 23, 2014\n- Key context: \"With oil prices declining by 40 percent since June, the importance of diversification is once again highlighted.\"\n- Focus: The need for Gulf Cooperation Council (GCC) countries to adjust incentives for workers and firms to promote non-oil tradable-sector activity and reduce reliance on oil revenues."
    },
    {
      "heading": "Assessment of the current GCC growth model",
      "content": "- The GCC growth model relies on oil as the main source of export and fiscal revenues.\n- Achievements cited:\n  - Increased public sector employment.\n  - Increased spending on infrastructure, health, and education.\n  - Raised standards of living.\n  - Support for private sector activity in construction, trade and retail, transport, and restaurants.\n- Weaknesses cited:\n  - Exposure to volatility in the global oil market.\n  - Limited private sector job creation relative to long-term needs.\n  - Need to establish a non-oil economy for a future with diminished oil revenues.\n- Distortive effects of oil revenues noted:\n  - Appreciation of the real exchange rate (Dutch disease) can reduce competitiveness of other sectors.\n  - Oil revenues can corrode governance and institutions and induce economic volatility."
    },
    {
      "heading": "Lessons from international case studies",
      "content": "- Historical note: Few examples of successful diversification while oil production horizons remain long.\n- Countries examined as examples: Malaysia, Indonesia, Mexico; Chile (diversification away from copper).\n- Common themes from successful cases:\n  - Diversification took a long time and often accelerated only when resource revenues began to dwindle (example: Malaysia’s export-oriented strategy began in the early 1970s, with rapid growth in export sophistication in the 1980s–90s; \"It took more than 20 years to reach a level of sophistication comparable to some advanced economies.\").\n  - Successful countries implemented incentives for firms to develop export markets and for workers to acquire relevant skills and education.\n  - Policies and actions used:\n    - Investing in high-productivity industrial clusters, even absent prior comparative advantage.\n    - Developing horizontal and vertical linkages from industrial clusters (examples: Malaysia — downstream/upstream activities around rubber and palm oil; Mexico — linkages around the automobile sector).\n    - Using foreign capital to promote technological transfer via free trade zones, tax incentives, and easing tariff and non-tariff barriers (example: Indonesia in the 1980s; Mexico’s accession to NAFTA attracting FDI).\n    - Using export subsidies, tax incentives, and access to finance to facilitate entrepreneurial risk-taking, especially for small and medium-sized enterprises; support by development banks, venture capital funds, and export promotion agencies.\n    - Investing in training to ensure availability of high-skilled workers (examples: Malaysia and Mexico focused on training, skill-upgrade, and sponsoring workers for foreign training)."
    },
    {
      "heading": "Findings on why GCC diversification efforts have been limited",
      "content": "- Policies to date focused on:\n  - Securing a stable economic environment.\n  - Improving the business climate.\n  - Investing in infrastructure and education.\n- These steps have yielded some GDP diversification but have not sufficiently addressed the distortive effect of oil revenue distribution on incentives.\n- Specific distortions:\n  - High wages and generous benefits encourage nationals to seek public sector employment over private sector jobs.\n  - High government spending in a relatively protected domestic environment encourages production of non-tradable goods and services.\n  - Exports remain \"mostly oil\" despite some progress."
    },
    {
      "heading": "Policy recommendations and measures to spur diversification",
      "content": "- Realign incentives for firms and workers to promote non-oil tradable activity:\n  - Move away from using the public sector \"as the employer of first and last resort.\"\n  - Ensure education and training systems provide skills needed for private sector employment.\n  - Develop stronger social safety nets to guarantee minimum income levels and support job search activities.\n- Firm-side measures:\n  - Address lack of competition in some domestic markets.\n  - Reduce incentives for low-productivity production.\n  - Encourage firms to pursue export opportunities and look beyond domestic markets.\n\nInternational Monetary Fund\n\n---\n\n Content in this bundle\n\n- Car122314aapdf (PDF){rel=\"external\" type=\"application/pdf\"}\n- Sdn1412pdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Country Focus\n- Policy\n- IMF on oil price slump\n- Latest regional outlook\n- Gulf development conference\n- Financial stability in Gulf\n- Concentration in GCC banks\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar122314a"
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    "Published: December 23, 2014",
    "Publication date: December 23, 2014",
    "Key context: \"With oil prices declining by 40 percent since June, the importance of diversification is once again highlighted.\"",
    "Focus: The need for Gulf Cooperation Council (GCC) countries to adjust incentives for workers and firms to promote non-oil tradable-sector activity and reduce reliance on oil revenues.",
    "The GCC growth model relies on oil as the main source of export and fiscal revenues.",
    "Achievements cited:",
    "Weaknesses cited:",
    "Distortive effects of oil revenues noted:",
    "Historical note: Few examples of successful diversification while oil production horizons remain long.",
    "Countries examined as examples: Malaysia, Indonesia, Mexico; Chile (diversification away from copper).",
    "Common themes from successful cases:",
    "Policies to date focused on:",
    "These steps have yielded some GDP diversification but have not sufficiently addressed the distortive effect of oil revenue distribution on incentives.",
    "Specific distortions:",
    "Realign incentives for firms and workers to promote non-oil tradable activity:",
    "Firm-side measures:",
    "[Car122314aapdf (PDF)](/-/media/websites/imf/imported/external/arabic/pubs/ft/survey/so/2014/car122314aapdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[Sdn1412pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/sdn/2014/_sdn1412pdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[IMF Country Focus](https://www.imf.org/en/news/country-focus)",
    "[Policy](https://www.imf.org/en/news/search)",
    "[IMF on oil price slump](http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/)",
    "[Latest regional outlook](http://www.imf.org/external/pubs/ft/reo/2014/mcd/eng/mreo1014.htm)",
    "[Gulf development conference](http://www.imf.org/external/pubs/ft/survey/so/2014/CAR060314A.htm)",
    "[Financial stability in Gulf](http://www.imf.org/external/pubs/ft/survey/so/2014/CAR031914A.htm)",
    "[Concentration in GCC banks](http://www.imf.org/external/pubs/ft/survey/so/2014/INT122214A.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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