Soaring of the Gulf Falcons: Diversification in GCC Oil Exporters
in Seven Propositions
Reda Cherif and Fuad Hasanov
International Monetary Fund
30 April 2014
DISCLAIMER: THE VIEWS EXPRESSED HEREIN ARE THOSE OF THE AUTHORS AND SHOULD NOT BE
ATTRIBUTED TO THE IMF, ITS EXECUTIVE BOARD, OR ITS MANAGEMENT.
Proposition 1
The prevailing growth model achieved a large improvement in human development indicators but also resulted in a decline in relative economic performance.
The current model relies heavily on oil
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
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50
60
70
80
90
100
Average Oil Exports (% Exports)
1980s 1990s 2000s
1/ U.A.E. Goods and Services exports excludes re-exports.
Majority of nationals work in the government in most GCC
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bahrain Kuwait Oman Qatar Saudi Arabia
Nationals: Public Nationals: Private Expats: Public Expats: Private
Composition of GCC Labor Market, 20121
1Kuwait data is 2011; U.A.E data unavailable for publication.
The GCC achieved huge improvements in HDI and living standards
55
60
65
70
75
80
55
60
65
70
75
80
1980 1990 2000 2012
GCC Life Expectancy, 1980–2012
(Years)
GCC
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
United Arab Emirates
But relative income declined
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Bahrain Kuwait
Oman Qatar
Saudi Arabia United Arab Emirates
GDP Per Worker (PPP $), 1970–2010
Proposition 2
A sustainable growth model requires a diversified tradable sector.
Non-oil GDP increased but productivity declined
Bahrain
KuwaitOman
Qatar
Saudi Arabia
United Arab Emirates
Indonesia
Norway
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0
Avg TFP Growth 1980-2010 or available
Avg
No
n-o
il R
eal
GD
P G
row
th 1
98
0-2
010
or
avai
lab
le
Non-Oil GDP is misleading indicator
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1990 1993 1996 1999 2002 2005 2008 2011
Agriculture Construction Transport
Trade Manufacturing Mining
Other
Bahrain - GDP by Sector, 1990–2011
(Share of total)
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1990 1993 1996 1999 2002 2005 2008 2011
Agriculture Construction Transport
Trade Manufacturing Mining
Other
Singapore - GDP by Sector, 1990–2011
(Share of total)
It is all about export composition
79.1%
9.9%
6.2%1.5%
1.1% 0.8%1.3% Oil exports
Aluminum
Other Metals
Chemical
Food
Processing
Textiles
Other Light
Industry
Bahrain, Top 50 Exports of Goods, 2008
(Percent of total exports of goods)
24%
2%
1%
10%
11%
51%
1%
Singapore Exports by Sector, 2008
(Percent of total exports of goods)Oil
Food
Crude Materials
Chemical
products
Manufactured
Goods
Machinery &
Transport
EquipmentOthers
Yet GCC countries have attempted to diversify their economies
• Development of petrochemical and metal industries bear little linkages to the rest of the economy
• Promotion of services helped diversify economies but services may not be sufficient for sustainable growth – Focus on tourism, logistics, finance, etc.
• Recent attempts at creating clusters, technology parks, and manufacturing industries in free zones have yet to yield substantial results
Export sophistication has not improved in the GCC
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14000
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Co
nst
ant
$
Kuwait Oman
Saudi Arabia U.A.E.
Indonesia Malaysia
Mexico
Goods Export Sophistication: 1976–2006
Sustainable growth requires diversified exports
• Empirically, export sophistication is an important determinant of long-run growth – Hausmann, Hwang, and Rodrik (2007), Spatafora and Papageorgiou (2013), and Cherif and Hasanov (2014)
• Theoretically, continuous introduction of new goods and tasks and moving up the “quality ladder” lead to sustained productivity gains – Lucas (1993) and Aghion and Howitt (1992)
Proposition 3
Both the initial technological gap and the size of oil revenues determine the chances of success or failure at diversification in oil-exporting countries, while policies adopted magnify or mitigate this effect.
The GCC faced high oil revenues at low levels of technology
Kuwait
Norway
OmanQatarSaudi Arabia
U.A.E.
Bahrain
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600
700
0 2000 4000 6000 8000 10000 12000
Re
al M
ach
ine
ry e
xp
ort
s p
er
ca
pit
a, 1
97
0
Real oil exports per capita, 1970-2012 average
Machinery Real Exports per Capita (1970) vs. Oil Revenues
(1970-2012 Average)
US level in 1970
Low Dutch Disease
Moderate Dutch
Disease
Acute Dutch Disease
Moderate to High Dutch Disease
Low Dutch Disease
Acute Dutch Disease
Moderate to High
Dutch Disease
Canada
The technological upgrading that followed was minimal
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3000
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Ma
ch
ine
ry r
ea
l e
xp
ort
s p
er
ca
pit
a
Real oil exports per capita, 1970-2000 average
Machinery Real Exports per Capita (1970 vs. 2000) vs. Oil Revenues (1970-2000)
Machinery real exports per capita,
2000
Machinery real exports per capita,
1970
US level in 2000
US level in 1970
Canada
Oman
Norway
U.A.E.
Kuwait Qatar
Bahrain Saudi
Arabia
Malaysia
Mexico
Indonesia
Norway: Falling prey to the Dutch Disease
• In 2012, manufacturing hourly wages were the highest in the world and about double that of the US or Japan
• Unit labor costs increased by 50 percent in the 2000s, whereas they declined in Germany and Sweden
• Annual average hours per worker declined by 600 hours since 1960 to about 1400 hours in 2012, third lowest in OECD
The Norwegian Disease: Norway experienced decline in export sophistication
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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Canada Denmark Malaysia Norway
Goods Export Sophistication, 1976-2006
A few relative successes: Importance of policies
• Indonesia, Malaysia, and Mexico did better than other oil exporters and prepared the ground before the oil revenues started falling
• Import substitution strategy created mostly inefficient firms because they were not encouraged to compete on international markets
• The policy mix of Malaysia involved investment in higher value added comparative advantage industries (e.g. natural resource-related manufacturing) and going beyond comparative advantage (e.g. electronics)
• Indonesia and Mexico show that relying mostly on low wages and labor intensive manufacturing would eventually lead to limited productivity gains
• These countries’ experience suggests that a focus on competing on international markets and an emphasis on technological upgrade and climbing the value added ladder is crucial
Export sophistication improved amid dwindling oil revenues
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10000
-600
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-200
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200
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1970
19
73
19
76
1979
1982
19
85
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88
1991
1994
19
97
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00
2003
2006
20
09
20
12
Indonesia
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2012
Malaysia
Net oil exports deflated by US CPI per capita Exports Sophistication (RHS)
Proposition 4
Exports diversification must start now.
It takes decades
• The experience of oil exporters and other countries suggests that it take a long time to develop industries
• It took Malaysia 20-30 years to increase export sophistication
• What if oil prices fell again as in the 1980s-90s?
Avoiding another large and lasting decline in welfare
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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Co
nst
ant (
19
82
-84
) $/b
arre
l
Ind
ex (1
98
0=
100
)
Real Consumption per capita and Real Oil Price, 1980–2010
Real Consumption Per Capita (PPP) Real Oil Price (RHS)
Average NFA/GDP: 3 percent in 1980 vs. 54 percent in 2006
Proposition 5
The standard policy advice—implementing structural reforms, improving institutions and business environment, investing in infrastructure, and reducing regulations—may not be sufficient to spur tradable production because of market failures.
Standard policy advice for growth may not be sufficient
• Standard policy prescription includes macroeconomic stability, minimum state intervention and an enabling environment conducive to investment in both physical and human capital
• It consists in tackling “government failures” (Rodrik 2005)
• The GCC has improved in most of these dimensions but relative economic improvement did not follow
Tackling “Government Failures” I
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020406080100120140
Ease
of
Do
ing
Bu
sin
ess
(Ran
kin
g a
mo
ng
18
3 c
ou
ntr
ies)
Global Competitiveness Index
(Ranking among 134 countries)
Doing Business vs. Global Competitiveness Index, 2013Singapore
U.A.E
Kuwait
Bahrain Oman
Saudi Arabia
Qatar
Tackling “Government Failures” II
1
2
3
4
5
6
7
$500 $5,000 $50,000
Sco
re
GDP per capita
Kuwait
Bahrain
Saudi
Arabia
Qatar
U.A.E.
Quality of Infrastructure, 2013
(Score of 7 "meets the highest standards in the world")
USA
Tackling “Government Failures” III
-20
20
60
100
140
180
-20
20
60
100
140
180
Bahrain Kuwait Oman Qatar Saudi
Arabia
U.A.E. Chile Malaysia Mexico Indonesia Norway
Local competition intensity Prevalence of trade barriers
Sources: The World Economic Forum's Global Competitiveness Indicators (2013-14).
Monopoly Related Indicators (Rank 1 - 142, the lower rank the better)
Tackling “Government Failures” IV
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Bahrain Kuwait Oman Qatar Saudi
Arabia
U.A.E. Chile Malaysia Mexico Indonesia Norway
Source: The World Economic Forum's Global Competitiveness Indicators
(2013-14).
Burden of customs procedures
“Market failures” are the binding constraint
• High scores in infrastructure quality and other business quality indicators in the GCC and much better than in successful oil exporters
• Norway could not escape the Dutch disease although government failures are basically nonexistent there, in particular in comparison with other oil exporters
• The diversification in successful oil exporters began when oil revenues were dwindling or about to start declining. Were it due to solving the government failures, this would have been a very unlikely coincidence
• Firms choose to produce non-tradables over tradables because of risk-return trade-off largely favoring non-tradables
• The “market failures” necessitate government intervention
Proposition 6
The government needs to change the prevailing incentive structure in the society.
Current incentive structure is not conducive for sustainable growth
• Public sector is the “employer of first resort”
• Generous pensions, early retirement age (below 60), high consumer subsidies (10-20 percent of GDP) and transfers
• The current system is not conducive to investment in human capital, employment in the private sector, and entrepreneurship
Changing incentives
• Setting firm limits on public employment and wages, substituted with social safety nets and minimal income and training vouchers
• Improving education quality through – Early childhood education programs (Heckman 2008) – Teacher quality enhancement programs
• Changing social attitudes through “Saemaul Undong”-type social development program – Encouraging communities to undertake small scale projects to improve
their surrounding environment, followed by the investment in income-generating projects
– The Saemaul Undong “…was in a sense, a movement for spiritual reform of Korean people, and has achieved a lot in this respect. It changed people’s attitude from laziness to diligence, from dependence to self-reliance, and from individual selfishness to cooperation with others.” (Choe 2005)
Proposition 7
The state could act as a venture capitalist and foster public-private collaboration to design and implement strategies that go beyond the comparative advantage sectors and target high value-added sectors with large potential spillovers and productivity gains.
The state as a venture capitalist
Experiences in other countries suggest: • Policy mix in vertical and horizontal diversification
• Vertical approach:
– Creating clusters around comparative advantage sectors in oil and gas, e.g. Norway in the 1970s
– Building domestic capabilities and climbing the “quality ladder” with the emphasis on technological transfer and upgrade
• Horizontal approach: – Endeavoring beyond comparative advantage sectors – Pursuing high value added manufacturing and services such as IT – Venturing into innovation sectors
Policies for diversification in other countries
• Taxing non-tradable sectors and using subsidies to support exporters
• Using development banks, venture capital funds, and export promotion agencies
• Creating clusters with links to universities and investing in specific-purpose skills and infrastructure
• Coordinating regionally on strategies
3 key elements of success
• Clarity: The main policy objective should be the development of domestic exporters in high value added products stated in clear terms and measurable objectives
• Discipline: There must be a high level of government commitment to the objectives in social and industrial development with a comprehensive and credible accountability framework
• Trust: A high level of cooperation and trust is required for policies to succeed. Without tackling simultaneously social incentives, the strategies proposed would fail
Concluding remarks
• International experience of successful oil exporters suggest that the GCC countries have been trying some of the policies cited (e.g. horizontal and vertical diversification, clusters, investment funds)
• However, the main challenge is to fix the incentives for both firms and workers
• An emphasis on competing in international markets, technological upgrading, climbing the value added ladder, and enforcing market discipline and accountability is needed
