Gulf States Need to Grow Beyond Oil for Future Prosperity
Sluggish productivity and an over-reliance on oil and gas pose a threat to the future economic expansion of the Gulf, according to a major new report on the region published today by The Conference Board, the international business membership and research organisation, with the support of the Gulf Investment Corporation.
The report, “Growing Beyond Oil”, shows that output per hours worked across Gulf Cooperation Council (GCC) countries actually fell slightly (by 0.2 per cent) between 2000 and 2007 once the oil and gas sector is excluded. It warns that an over-reliance on natural resources is a shaky foundation for long-term economic development and will hold back other sectors of the economy, such as high-productivity manufacturing and financial services. Currently, much of the oil and gas revenues are being spent on low-productivity construction and real estate which give only a superficial impression of affluence.
To achieve sustainable increases in living standards over the long term, the region needs to address both institutional barriers to productivity (that prevent resources flowing to their most productive use) and fix the most critical labour market inefficiencies (to ensure a highly skilled and motivated workforce).
While GCC countries have enjoyed rapid overall economic growth in recent years, averaging 5.1 per cent a year since 2000, this has been driven by employment growth rather than by a rise in productivity. Since 2000, output per hours worked (including the oil and gas sector) has risen by a meagre 1 per cent a year, much lower than India (4.9 per cent), China (10.5 per cent) and even the United States (1.4 per cent) and Europe (1.5 per cent).
There are notable differences in productivity performance within the GCC, with the smaller, more diversified countries (Bahrain 5.1 per cent, Oman 4.1 per cent) showing better performance than the more resource-dependent ones (United Arab Emirates -0.1 per cent, Saudi Arabia 0.8 per cent, Kuwait 1.3 per cent and Qatar 1.8 per cent).
The report indicates that operational and labour market inefficiencies are offsetting most of the gains from technological advances. In particular, a lack of skilled workers in the region is the biggest long-term threat to future productivity growth.
Bart van Ark, The Conference Board’s chief economist and author of the report, said: “The impressive economic performance of GCC countries is overshadowed by a disappointing productivity track-record. The critical danger is that the GCC will be unable to develop home-grown talent or attract a sufficient number of skilled people from outside the region. The region needs to tackle a wide range of issues simultaneously, including diversification away from oil and gas towards the creation of new productive jobs, to build a solid foundation for future economic expansion.”
Hisham al-Razzuqi, GIC’s Chief Executive Officer, said: “Oil is a depleting natural resource and the life of nations is not measured in decades. This study attempts to identify the roadblocks that, if removed, could improve productivity and sustainable growth in the region. The study shows that the present status quo is unsustainable because the region will face difficult times in providing sustainable growth to an increasing population if present trends continue."
Alternative scenarios are mapped out in the report, each exploring a different policy option, together with forecasts for their likely impact by 2020. Combining an improved institutional framework with a more efficient labour market would see the region becoming one of the fastest growing emerging economies and enable its people to experience significant advances in living standards. Doing nothing implies relative economic decline compared to other regions of the world, stagnant living standards and mounting social tensions.
The report is part of a major research programme on productivity, performance and progress in the GCC region which The Conference Board is running in conjunction with Gulf Investment Corporation (GIC). Headquartered in Kuwait, GIC is opening offices in the major markets of the GCC: Saudi Arabia (Riyadh), UAE (Dubai), and Qatar (Doha).
