## IMF Survey : Oil Price Drop Highlights Need for Diversity in Gulf Economies

_IMF News, December 23, 2014_

## Source details

**Canonical URL:** [IMF Survey : Oil Price Drop Highlights Need for Diversity in Gulf Economies](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar122314a)

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## Bibliographic details
- Published: December 23, 2014

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### Overview and context
- 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.

### Assessment of the current GCC growth model
- The GCC growth model relies on oil as the main source of export and fiscal revenues.
- Achievements cited:
  - Increased public sector employment.
  - Increased spending on infrastructure, health, and education.
  - Raised standards of living.
  - Support for private sector activity in construction, trade and retail, transport, and restaurants.
- Weaknesses cited:
  - Exposure to volatility in the global oil market.
  - Limited private sector job creation relative to long-term needs.
  - Need to establish a non-oil economy for a future with diminished oil revenues.
- Distortive effects of oil revenues noted:
  - Appreciation of the real exchange rate (Dutch disease) can reduce competitiveness of other sectors.
  - Oil revenues can corrode governance and institutions and induce economic volatility.

### Lessons from international case studies
- 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:
  - 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.").
  - Successful countries implemented incentives for firms to develop export markets and for workers to acquire relevant skills and education.
  - Policies and actions used:
    - Investing in high-productivity industrial clusters, even absent prior comparative advantage.
    - Developing horizontal and vertical linkages from industrial clusters (examples: Malaysia — downstream/upstream activities around rubber and palm oil; Mexico — linkages around the automobile sector).
    - 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).
    - 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.
    - 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).

### Findings on why GCC diversification efforts have been limited
- Policies to date focused on:
  - Securing a stable economic environment.
  - Improving the business climate.
  - Investing in infrastructure and education.
- These steps have yielded some GDP diversification but have not sufficiently addressed the distortive effect of oil revenue distribution on incentives.
- Specific distortions:
  - High wages and generous benefits encourage nationals to seek public sector employment over private sector jobs.
  - High government spending in a relatively protected domestic environment encourages production of non-tradable goods and services.
  - Exports remain "mostly oil" despite some progress.

### Policy recommendations and measures to spur diversification
- Realign incentives for firms and workers to promote non-oil tradable activity:
  - Move away from using the public sector "as the employer of first and last resort."
  - Ensure education and training systems provide skills needed for private sector employment.
  - Develop stronger social safety nets to guarantee minimum income levels and support job search activities.
- Firm-side measures:
  - Address lack of competition in some domestic markets.
  - Reduce incentives for low-productivity production.
  - Encourage firms to pursue export opportunities and look beyond domestic markets.

*International Monetary Fund*

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## Content in this bundle

- [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"}

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar122314a_