Analysis / N. Janardhan: Whither the Gulf? Toward Economic Diversification


With the “Arab Spring” or “Winter of Arab Discontent” throwing up conflicting signals, the Middle East Institute, Singapore, made a notable attempt to explore the relevance and impact of the tumultous events by hosting a conference under the banner “Whither the Gulf? Accomplishments, Challenges and Opportunities.”

The topic I addressed at the conference was “Toward Sustainable Growth: the Economic Diversification-Knowledge Economy Link.” This is relevant to the recent developments in the region because as much as the call for freedom is seen to be a political demand, it seems to be grounded in economic factors.

And herein lie some pointers to why the crisis has evolved the way it has among several Gulf Cooperation Council (GCC) countries, unlike elsewhere, and what key factors could either help to keep the lid on the boiling pot or blow its top in the future.

The three elements in the theme mentioned above are strategically linked. To achieve sustainable development in an oil-rich region, economic diversification is a necessity, just as building a knowledge economy is mandatory to sustain a non-oil economy.

There is no doubt that one of the effective planks that the GCC countries have relied on to deal with political challenges is economic gratification. Typical of a “patron-client” scenario, this was realized because of their bank of wealth.

The GCC’s collective GDP has crossed the trillion-dollar mark and is expected to touch $2.3 trillion by 2020. Its foreign assets are estimated to be worth $1.7 trillion and foreign liabilities are limited to $500 billion.

With such wealth, it is a matter of irony that they, for the first time, are pursuing economic diversification during high oil prices, rather than do so when prices go downward.

The logic behind this reasoning over the last decade could be any or many of the following – longstanding pressure from international financial institutions to develop a non-oil economy; consideration that oil may not last forever; realization that since oil prices are likely to continue to remain high, it makes sense to conserve and prolong the longevity and value of hydrocarbon resources, rather than pump more to meet developmental expenditure; new confidence that they can develop an efficient non-oil economy just like they did with the oil economy; and most importantly, perhaps, the realization that this is the only way out to tackle the impending unemployment of nationals, which has political underpinnings.

The last factor is particularly relevant because the region cannot continue to excessively depend on foreign labor in the long term. A youth bulge in a strategic region without answers to unemployment problems is political dynamite.

According to a study by McKinsey & Co., the GCC countries need to create four million jobs in the next 20 years. With the public sector unable to accommodate the growing unemployed youth, private companies would be required to create the majority of these jobs.

However, the private sector is producing only about 82,000 jobs per year for nationals. To bridge the gap, the private sector would need to quadruple its job creation rate and pay twice as much for each of these jobs.

It is these compulsions that led the GCC countries, like other emerging economies, to be bitten by the sustainable development mantra.

The GCC countries now believe that a sustainable economy enhances their standard of living by creating wealth and jobs, encouraging the development of new knowledge and technology and ensuring stability. For this, a diverse economy is considered important.

To facilitate the growth of the non-oil economy, projects worth more than $2.4 trillion are either planned or under construction in the region. Many of these are expected to be complete before the end of the decade, including the Gulf railway project, the first nuclear energy plant, economic cities and a regional electricity grid, among others.

In fact, the impact of the economic diversification process was evident following the financial crisis-triggered economic slowdown.

For example, lower oil prices resulted in Saudi Arabia’s gross domestic income from oil production falling to 46.7 percent in 2009, down from 60.7 percent a year earlier.

However, this was partly offset by an increase of 5 percent in the contribution of the non-oil sector to the GDP. Similarly, the private sector’s contribution to GDP also rose from 24 percent to 32 percent during the same period.

Qatar, similarly, has earmarked 50 percent of its investments to non-oil sectors, including about $100 billion on 2022 FIFA World Cup projects. Doha has also said that it aims to reduce its economic reliance on hydrocarbons to zero by 2020.

Talking about football, it is interesting to note that sports, tourism, airlines and hospitality industries are part of the diversification mix. Interest in the hi-tech chip-making industry is right up there too.

The most ironical diversification is, of course, into the renewable energy sector – Abu Dhabi is now the headquarters of the International Renewable Energy Agency (IRENA).

And, less said the better about Dubai, which is famous as a city of several cities – Internet City, Media City, Sports City, Healthcare City, Academic City, and the like. It is perhaps these, among others, that has enabled the emirate not to become a “ghost town” as some sections of the Western media portrayed it to be after the 2009 financial crisis.

Bahrain and Oman have also taken several steps toward economic diversification, though not with the same measure of success as the other GCC members, which partly explains the pronounced Arab Spring repercussions there.

Thus, it is obvious that the GCC countries have learnt a lesson after squandering oil wealth during the 1970s. The relative calm in the GCC region has not been a consequence of just possessing oil wealth, but ensuring pragmatic politics in disbursing the same. Economic reform is encouraging private sector growth, which, in turn, is capable of providing competitive and underprivileged nationals with opportunities to take up challenging jobs, rather than rely just on the public sector in the long run.

How this economic diversification process intersects with the knowledge economy scenario that could help create sustainable growth will be addressed in next week’s column.

(Dr. N. Janardhan is a UAE-based political analyst, and author of “Boom Amid Gloom – The Spirit of Possibility in the 21st Century Gulf” (Ithaca Press), scheduled to be released in mid-2011)