The Gulf Falcons’ path to diversification

Imagine a future where oil is no longer the main source of energy in the world. Imagine a future where the cutting-edge energy technology is invented in the Silicon Valleys of the Gulf, bustling with young entrepreneurs from the region. Imagine a future where cities of the Gulf are beacons of knowledge and innovation.
To achieve this future, these countries need to change from oil-dependent economies to innovative and vibrant ones.
This change requires ambitious goals and daring actions.
This change is difficult, yet necessary to improve productivity and provide employment for its young population.
The Gulf Cooperation Council (GCC) countries enjoy high living standards today, and to continue to enjoy them tomorrow, the pursuit of diversification is key.
On their way, the GCC countries will have to navigate uncharted territory. In the land where many of the navigation instruments were invented, supporting voyages and caravans to distant lands and seas, today’s generations will have to chart their own way. Policymakers and societies will have to work together to carry out this tremendous task.
They will have to experiment, sometimes taste failure, and learn from these mistakes to continue on their path to diversification.
Our recently published book, Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification, brings together successful experiences from other countries, such as Brazil, Korea and Malaysia to help guide the GCC countries today.
The book is based on the high-level diversification conference organized by the International Monetary Fund (IMF) and the Ministry of Finance of Kuwait, with the IMF-Middle East Center for Economics and Finance (CEF) about two years ago at the time when oil prices were still high and the topic was not as pressing.
Today, diversification is back on top of the policy agenda, as underscored by the recent release of Saudi Arabia’s Vision 2030, which sets the goal of a far-reaching transformation of the economy to reduce its dependence on oil, increase the role of the private sector, and create more jobs for nationals.
The stories of the countries profiled in the book reveal that for diversification to take hold, incentives for firms and people need to be realigned.
True economic diversification focuses on developing non-oil exports in tradable industries to create needed productivity gains and spillovers to the rest of the economy.
The investment in people and skills will help foster local talent needed for export-driven firms. Other countries’ experiences show that policies to support exporters include the use of venture capital funds, development banks and export promotion agencies while the emphasis on technological upgrading and competition in international markets are crucial.
Singapore has made major strides in high-tech manufacturing. Malaysia has developed not only rubber-related but also electronics exports.
The Brazilian Development Bank has spearheaded efforts in building pharmaceuticals, sugarcane, and software industries in Brazil.
The policies to support industries also need to be combined with early childhood education, training and skill development programs, and improvements in education quality.
The task of changing incentives for firms and workers falls primarily on the shoulders of the state. The standard growth policy advice focusing solely on the facilitating state may not be enough to achieve true diversification.
As discussed in the book, the leading hand of the state should help in the diversification process to encourage firms to enter the tradable sector and export while supporting workers to gain the relevant skills.
To create incentives for workers in the private sector and skill acquisition, the public sector should not be the “employer of first resort” and should keep firm limits on public wages and employment.
The challenge facing policymakers may seem daunting, but the experiences of other countries, their successes and failures, and policies pursued and tools used, could help blaze the path forward.
— Reda Cherif and Fuad Hasanov are economists at the IMF. Min Zhu is IMF deputy managing director.