The discovery of ‘Black Gold’ in the Arabian Peninsula has redefined the fortunes of the region since the late 1940’s and 1950’s when GCC countries started trading crude oil with the outside world. Ultra-modern cities were built at breakneck speed, punctuated by world-class infrastructure, architectural marvels, welfare state and escalating GDP per capita at par with and often outgrowing the most advanced G8 economies of the world. Petrodollars accounted for more than 90% of the revenue streams in almost all GCC countries for decades. The downside risk of “putting all eggs in one basket” dawned on these economies by sporadic oil price shocks exacerbated by the ‘Great Recession’ of 2008 and culminating in the Covid-19 pandemic that ravaged global economies and brought them to a grinding halt.
The cascading effect of the ‘Great Lockdown’ disrupted global supply chains and commercial activity causing a cumulative loss of around 4 trillion dollars of economic output in the global economy, shrinking global GDP by 4.4% in 2020, according to an IMF report. Despite timely government intervention with fiscal stimulus and macroeconomic prudence, Gulf economies contracted by 6.1% in 2020, fiscal deficits soared to 9%, worsened by plummeting Brent crude prices to $23 per barrel in April 2020. The need for diversification of GCC economies from oil revenues have intensified since the ‘Black Swan’ event of coronavirus pandemic as it had started cannibalizing into the 2 trillion dollars’ worth of financial assets invested in sovereign wealth funds (SWF) created by GCC countries, for future generations, since the oil rush. The IMF estimates that this conserved wealth will likely deplete by 2034, if Gulf states fail to pursue structural and financial reforms aimed at diversification from a “Carbon Economy”.
Non-Oil Sectoral Diversification:
GCC countries still have to foot a substantial import bill on its current account for most essential commodities despite small scale production of goods and services within its borders. The volume of manufacturing of agricultural and convenience products barely caters to the consumption needs of 29 million expats and 27 million citizens inhabiting the region. Dubai and Bahrain have made laudable progress in creating business services as the engine of growth since these states are low (or depleted) on oil reserves.
Attracting FDI’s into diverse manufacturing sectors should assume priority as this sector spawns ancillary industries covering upstream and downstream operations, build industrial townships and subsequently enable proliferation of service sectors. Thus, the production-consumption cycle will be concentrated within the region, saving import costs and offering the opportunity to trade surpluses in global markets, earning non-oil forex revenues. These structural reforms must be adequately supported by a sound industrial policy, provision of low-cost energy, connected infrastructure, low regulatory compliance, VAT exemptions for export-oriented units apart from availability of cheap land, labor and capital. Only Oman and UAE registered net FDI inflows higher than global average of 2.5% of GDP between 2015-‘19, whereas in other GCC states, it is only a paltry 1.5%.
GCC states should ramp up the number of free economic zones, investment parks and innovation hubs to realize this vision. UAE leads the pack with 45 free zones that allow 100% ownership to overseas firms. Bahrain’s International Investment Park, Qatar’s Science and Technology Park, Dubai’s Internet and Media City, Saudi Arabia’s Prince Abdullah Science Park are some of the innovation hubs that could lead the diversification challenge of these economies.
Automobile sector is quite promising to attract FDI’s since as an use case, there are no manufacturing units in the light motor vehicle (LMV) category in the GCC. Currently, more than USD 25 Billion worth of passenger vehicles are imported annually. The region could attract global car brands to initially invest in plants that perform complete knockdown (CKD) assembly operations and later transform into full-blown production facilities in the value chain. GCC economies could also campaign for investments as manufacturing base for Electric Vehicles (EV), as the world will soon transition into greener technologies and non-hydrocarbon mobility solutions.
A first mover advantage in the EV sector, touted as the industry of the future will restore the diminishing fortunes of the fossil fuel industry in the GCC. The region should invest pro-actively and heavily in “New Age” economy sectors like artificial intelligence, machine learning, fintech, blockchain, cybersecurity, 3D printing and additive manufacturing, cloud computing etc. through strategic collaboration with global leaders. Clean, renewable and sustainable energy solutions harnessing wind and solar power are excellent diversifying options due to abundant, 365 days of sunlight and uninterrupted wind potential. Green hydrogen and energy storage solutions like Lithium ion batteries are also sectors that are prospective in the future as inputs for non-carbon-based revenue models. Sustained economic growth is dependent on producing a wide basket of goods both for local consumption and international trade. The Chinese miracle of decades of double-digit economic growth transforming it into ‘the factory of the world’ has its roots in expanding the volume of goods and services, which, has led to China’s economic prosperity and global dominance.
Skilling and Innovation:
According to Adam Smith, widely regarded as ‘The Father of Economics’, one of the key paradigms of economic advancement and social progress, is an educated, healthy and skilled workforce. Internationalization of production and attracting FDI inflows have positive correlations with skilled human capital availability in a region. Therefore, it is imperative for GCC states to establish higher centers of learning at affordable cost, both to equip its citizens and attract international students. Though there are annexes of top ranked global universities like INSEAD, London Business School, Hult and University of Manchester, much work needs to be done to develop and establish world-class local universities covering a broad spectrum of courses, faculty and discipline. Only education can transform nations into knowledge societies and innovation economies.
Establishing such premier institutions of learning is a highly scalable model as GCC countries can market its top-quality education to African countries and Asian subcontinent, capitalizing on geographical proximity and cost-effectiveness compared to US and European universities. Higher centers of learning in the tertiary sector should be complimented by vocational education and training (VET) centers in the mode of Oman, that has introduced the Know About Business (KAB) program, whose curriculum is developed by International Labor Organization (ILO). Also, there is a commendable initiative from an Amman based non-governmental organization (NGO), INJAZ Al-Arab to identify, train and promote young aspiring local entrepreneurs in the Middle East.
Fostering Entrepreneurship by Developing Private Sector:
GCC nations have a peculiar political economy hinging on the supremacy of the public sector as the main channel for legitimately sharing the oil resource wealth to its citizens. Since the oil boom, government and quasi-government structures and institutions were instrumental in building high quality infrastructure, dispensing public benefits, utilities, healthcare, education and insurance. Even after economic prosperity and wealth generation, the role of public sector remains dominant well into the 21st century. The mindset of local citizens in these countries are well entrenched towards high paying public sector jobs. Clientelism and informal networks (a version of lobbying) also play a part in securing government contracts and exclusive licenses, even for private business owners. As a result, a culture of entrepreneurship and innovation were slow to kickstart among the local population.
Private investment as a percentage of GDP is the key driver of growth in developed and developing markets. Private sector in the GCC is over-regulated and much of its activity is run through and governed by public institutions, mostly financed by government banks and often incentivized through subsidies and handouts. Though the start-up ecosystem is gaining traction in this digital age, it still is in rudimentary stage. GCC rulers should envision an inventive and coherent strategy to foster and promote entrepreneurship. Entrepreneurial ecosystems translate into disruptive innovations leading to the explosion of small and medium enterprises (SME’s) run by local CEO’s. Regulatory barriers that act as impediments to ease of establishing start-ups and doing business should be addressed and removed.
Political and Regulatory Stability:
Finally, GCC countries should offer the world a safe and conducive investment destination, delineating business from politics. The revoked embargo against Qatar by UAE, Bahrain and Saudi Arabia had earlier dented investor confidence that had also resulted in disrupting intra-trade relations and capital flight. Government policies in the region should be tied to business continuity and any arbitrary, overnight policy changes will deter potential investments. The regional economic cooperation between GCC countries could be enhanced by setting up of a free trade zone in the mold of European Union or NAFTA that facilitates better trade negotiations and preferential trade treaties with other trading blocs and countries.
Gulf economies are in transition and policy makers are hard-pressed to explore avenues for building dynamic and sustainable non-hydrocarbon economies. The future of GCC economies depend on visionary leaderships that are pro-reform and attuned to the rapidly changing technological revolutions and geopolitical equations that buffet the world.
About the author : Jaykhosh Chidambaran is an accomplished management professional with over 20 years of diverse industry experience in MNC’s and is currently an EdTech Growth and Strategy Consultant for India & Middle East. He is an alumnus of Chicago Booth School of Business.
Disclaimer : The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of TAS and TAS does not assume any responsibility or liability for the same.