By Santhosh V Perumal
The Gulf Co-operation Council (GCC) countries have to create a dynamic non-oil tradable sector to support sustainable growth as the main hurdle facing diversification efforts in the region is from market failures rather than government failures, according to a working paper of the International Monetary Fund (IMF).
“A strategy to diversify the non-oil tradable sector must be implemented now even for the richest GCC countries,” said the IMF paper ‘Soaring of the Gulf Falcons: Diversification in the GCC Oil Exporters in Seven Propositions’, authored by Reda Cherif and Fuad Hasanov.
The main hurdles facing diversification efforts in the GCC stem from market failures rather than government failures, with the incentive structure in society needing to be changed, it said.
“Although there is room for improving further the business environment, infrastructure, skill sets, and institutions, these are unlikely to be enough to spur non-oil exports on their own,” according to the paper.
To do so, it said, the government needs to change the incentive structure of the economy to encourage individuals to work in the private sector and for firms to look beyond the confines of domestic markets and seek new export opportunities.
Improving the quality of education especially in early childhood and implementing a social development programme are important elements of changing incentives, it added.
The GCC countries face a difficult task of refocusing their growth models towards creating more diversified economies with less reliance on hydrocarbons, which are driven by the private sector, and in which nationals have the skills to enter high value-added private sector jobs, it said.
In the GCC, some degree of co-ordination in terms of diversification strategies would be helpful to ensure that countries do not all develop in the same area and thereby risk crowding each other out, it said.
The working paper said the diversification experience of the few successful oil exporters suggests that diversification usually takes place amid dwindling oil revenues, and requires several decades of preparatory work to develop a non-oil tradable sector.
“Successful strategies have relied on a policy mix of promoting vertical diversification in “comparative advantage” sectors such as oil and gas and petrochemicals and endeavours into horizontal diversification beyond these sectors with an emphasis on technological upgrade and competition in international markets,” it said.
Highlighting that most export and fiscal revenues come from the sale of oil and gas, and these affect the economy through government spending, including public investment, it said the large amounts invested until now have not produced tradable sectors that are not geared toward oil and oil-derived products and these sectors have little export diversification and minimal linkages with the rest of the economy.
A large population of foreign workers, mostly low skilled, has been utilised in the development of non-tradable sectors rather than non-oil tradable, it said, adding “more importantly, the continuing reliance on the public sector to absorb new labour market entrants for nationals is unsustainable.”
Although all GCC countries are heavily reliant on hydrocarbons, their challenge to diversify varies depending on the specificities of each country, it said.
Despite the different reasons to diversify their economies, all GCC countries need to develop growth models that will allow their current and future citizens to continue to enjoy the fruits of the development that came with oil income in the last decades, the working paper said.