Policy planners in the Gulf must learn to think broadly

By Dr Ali Qassim Jawad/Abu Dhabi

Why is this? Economists quote three “cursing” factors: the erosion of terms-of-trade - the value of exports relative to imports; the Dutch disease - the relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector; and the crowding-out effect – when increased public sector spending replaces, or drives down, private sector spending.

Bad decisions and large ineffective policies by governments are also to blame. So, how should countries go about making the right decisions in terms of investing large revenue windfall from exhaustible resources to enhance the wealth of the current and future generations?

Sadly, the economic literature is more prolific on the nature of the problems rather than on the shape of the solutions.

Investment planning is no easy task. Investment decisions often create their own set of problems and what should have been the answer turns out to be the foundation for a host of new problems.

One way for policy planners to avoid making bad investment decisions is to use “scenario planning”: a strategic planning method used by organisations to think through different future scenarios based on known facts and assumed or possible trends. 

Scenario planning was popularised in the 1950’s by Herman Khan of the RAND Corporation, a US-based think-tank, which used the method while working with US military intelligence. During the Cold War, Khan encouraged the US military to think through the consequences of a nuclear war and to come up with ways to improve survival rates.

Royal Dutch Shell was the first commercial corporation to use scenario planning. In the 1970’s, oil was cheap and plentiful but Pierre Wack, Head of Corporate Planning, dared to question the unquestionable: “What would happen if in future this was no longer the case?”

Shell developed several scenarios based on alternative assumptions about future supplies and prices, to enable the company to shift investments from the expansion of production capacity to upgrading refinery output, years ahead of its competitors.

When the 1973 Oil Crisis erupted, Shell was prepared and, as a result, was able to outsmart most of its competitors at the time.

Today, most large corporations have adopted scenario thinking as part of their strategic planning.

In contrast, government policy makers have been slower to embrace scenario planning for formulating future economic development plans.

Adopting scenario planning would have great benefits for resource-rich countries with low populations, such as the majority of the Gulf countries. One of the key policy choices faced by the Gulf policy planners over the last decades has been whether to invest its oil revenues at home or abroad.

On the surface, these two options are perceived as delivering more or less a similar outcome: creating revenue, both now and in the future when oil stocks run out, that sustains the quality of life of these countries.

Yet, scenario thinking suggests that the results will be different depending on where revenues are invested. Investing in strategic industries “at home” creates jobs for nationals, develops the local economy and helps a country to retain control over its investments.

Domestic investment also increases a country’s “soft power” in the global economy and promotes a cosmopolitan society. Singapore has successfully followed this “GDP-driven” development path (referred to as the Factory Model by RAND). However, following this path does give rise to issues that are associated with the large influx of foreign labor necessary to support growth in the local economy.

These include social, economic, logistical, security, environment and cultural issues that arise when a country is home to a large expatriate population.

The alternative scenario of investing in strategic industries “overseas” has a more limited impact on the local economy. Although countries have less control over their investments, society back home remains more homogenous. The cost and complications associated with hosting a large expatriate population, such as congestion, pollution and crime, can be avoided.

Job opportunities can still be generated for nationals, although this might necessitate nationals relocating overseas to work for periods of time. Switzerland partly epitomises this “GNP-driven” policy (known as the Garden Model in RAND’s terminology).

The reality for Gulf economies is not that they should choose one development model over the other, but instead a mixture of the two. The challenge is how to make wise choices about what and where to invest at home and abroad while considering different scenarios that take into account as many variables as possible.

For policy planners in the Gulf, in the context of the changes in the Arab world this means fully considering the demographic, social and regional dynamics of each of their countries in future scenarios.

For example, how many jobs will we create for our young domestic population and how many expatriates will we need to import if we invest in a particular industry? What are the socio-economic implications if we develop knowledge based economies? These are just two of the many questions policy makers in the Gulf will need to answer before making future investment decisions.

♦ Dr Ali Qassim Jawad is research scholar at INSEAD and a senior advisor to governments on strategy, organisational reform and leadership.