GCC countries can gain $17.7 billion through diversification

GCC map

GCC map

The GCC countries’ economies diversification, according to Ernst & Young’s latest report that tracked the levels of diversification across the GCC and how to speed up progress, was presented at the Economist events, ‘Future of Work: Middle East’.

Introduction by The Economist :

Governments across the MENA region continue to invest heavily in diversification, local talent, innovation and entrepreneurship initiatives; however the challenges cannot be understated.

MENA is experiencing a ‘youth bulge’ with more than 30% of the population currently between the ages of 15 and 29, and youth unemployment averages hovering around 25%. Women in the region still lag far behind their international counterparts, with fewer than 20% of adult women in paid employment. Up to 90% of government jobs in some GCC countries are held by nationals, with a staggering 10% of GDP being spent on the annual government wage bill and IMF and World Bank reports have stated that there is a significant ‘skills mismatch’ in MENA countries, with education systems not meeting the requirements of the market. 

There are however many positive indicators that hint at a future full of promise and potential. The region’s focus on new technology, innovation, diversification and education paired with the active move towards becoming a knowledge economy underpins what many hope will be a whole new chapter in the region’s history.

The Gulf Cooperation Council (GCC) countries could earn as much as $17.7bn through diversification, especially in transport, financial services, tourism, telecoms and research and development (R&D) sectors, global consultant Ernst & Young (EY) has said.

“Now, with recent oil price volatility, diversification has returned to the top of the agenda but new approaches are needed,” EY said in its report ‘Digging beneath the surface: Is it time to rethink diversification in the GCC?’

If the GCC countries were to achieve the average OECD (Organisation for Economic Cooperation and Development) level of diversification, research suggests that this would be correlated with an increase in real GDP (gross domestic product) of 1.6%.  In other words, a diversified GCC would see an additional gain of up to $17.7bn, it said.

“To put that into context, it is more than three-quarters of the entire flow of foreign direct investment to the GCC region for 2013,” Gerard Gallagher, Middle East and North Africa (MENA) Advisory Leader, EY said.

Finding that diversification efforts over the past decade have relied heavily on governments recycling oil revenues into new sectors, it said that has created several promising new sectors, ranging from construction and transport to telecommunications and manufacturing.

But now that government budgets are tighter and the urgency greater, the focus and aims of diversification must be clarified, it said.

The EY Diversification Tracker, which benchmarks the GCC countries both globally and against each other, provides a standardized basis for assessing the degree to which economies have moved away from dependence on oil. It focuses on three aspects:

  • Export complexity,
  • Share of the non-oil sector and
  • Private versus public sector spending which have been combined to give a percentage of diversification relative to the highest global performer.

Multiplier sectors that fall in the ‘sweet spot’

The report identifies a ‘sweet spot’ where regional strengths, economic impact and nationals’ employment preferences meet, allowing all three factors to be achieved.

“There is a sweet spot where regional strengths, economic impact and nationals’ employment preferences meet, allowing all three factors to be achieved,” it said, highlighting that sectors that fall into the sweet spot include transport, financial services, retail and tourism, telecom and R&D.

These sectors are said to have a high economic multiplier; in other words, a dollar of investment translates into far more than a dollar of GDP due to the stimulation of other sectors, according to Gallagher.

The analysis of multiplier sectors in hydrocarbon economies shows that additional investment in oil and gas brings the least additional return to GDP at $1.30 and affects just seven other sectors, EY said.

Finding that construction is at the opposite extreme, the report found that it has the highest economic multiplier, averaging an impact of $1.80 in GDP for every dollar invested.  This trickle down feeds into almost every other sector, it said.

“The key is not for governments to pump more public money into these sectors. The public sector needs to shift from being the main investor to being the enabler and driver of business, resetting incentives, removing regulatory obstacles, encouraging collaboration and providing world-class infrastructure and services,” according to Michael Hasbani, New Markets Leader, MENA Advisory Services, EY.

Diversification will progress very slowly if the GCC region looks inward, focusing on protecting existing companies and jobs, rather than pushing them to be globally competitive, it said.

“Diversification will struggle if the GCC region only looks inwards.  Governments and companies in the region should shape global trends to its advantage.  The sectors that are preserved without transformation will no longer be relevant to the rest of the world, let alone competitive,” he said.  Despite the sharp fall in oil prices since mid-2014, most GCC states do not have an urgent need to diversify fiscal revenue through introducing sales or income taxes as they had built up substantial foreign assets during the oil boom.

However, the case for greater diversification in the long run, to reduce the volatility of oil price-driven booms and busts, has gained new impetus, EY said.

Prioritizing job creation

Creating jobs will be a critical outcome. However, diversification does not automatically create jobs that are viable substitutes for public sector employment. Creating private sector jobs will not ensure employment for young nationals unless they are taught the technical skills and professional attitudes that would both motivate and enable them to take on the increasingly demanding jobs that the knowledge economy brings.

To tackle this issue, many of the Gulf countries have been working to improve their education systems and have developed innovation ecosystems, encouraging technical research and entrepreneurship.

“Diversification will struggle if the GCC region only looks inwards. Governments and companies in the region should shape global trends to its advantage. The sectors that are preserved without transformation will no longer be relhttp://www.economist.com/evant to the rest of the world, let alone competitive. The window of opportunity to break the reliance on oil and gas is now, but it will require new and innovative approaches to make it happen. It is time to truly capitalize the collective strength of the GCC, integrating our economies and harmonizing regulations to encourage long term, sustainable prosperity and fulfil our global ambitions,” concludes Michael.

Sources :

  1. The Economist http://www.economist.com/
  2. Gulf News http://www.gulf-times.com/
  3. Bahrain News Agency http://www.bna.bh/
  4. Saudi Gazette http://www.saudigazette.com.sa/