Press Release: Education Reforms will Determine the Success of Gulf States’ Diversification Efforts

Ethical Markets Trendspotting

For immediate release: Tuesday, November 9th 2010

The Gulf Co-Operation Council— Bahrain , Kuwait , Oman , Qatar , Saudi Arabia and UAE—is one of the most oil-dependent regions in the world. Over the next ten years, however, the non-oil economy is expected to grow by 5.1% per year, much faster than the oil and gas sector, which is forecast to grow by only 3.3% per year, partly because of OPEC wariness about oil prices.
“Oil and gas will remain the single biggest economic sector, but its share of GDP is forecast to decline from 49% in 2008 to 31% by 2020. However, much of the non-oil economy will remain dependent on government spending, which is overwhelmingly financed by energy revenues,” said Jane Kinninmont, the report’s author. “Breaking the dependence on oil would require sweeping structural reforms that would be politically difficult to pursue.”
Nonetheless, substantial government investment in building the non-oil economy will generate a wide range of new opportunities for business and private-sector investment in the Gulf states . A new Economist Intelligence Unit report, sponsored by the Qatar Financial Centre Authority, presents a detailed analysis of how the structure of the GCC economies is (and is not) likely to change over the next decade as efforts to diversify away from oil are stepped up.
Key findings of the report include:
·         All the GCC states are looking to develop non-oil sectors in order to diversify their economies away from oil and gas. Previous oil price slumps have made the risks of oil dependence clear to the GCC states. They are also keen to diversify because oil and gas provide few jobs, and the region’s rapidly growing young population can no longer been absorbed by the public sector. And in the longer term, the GCC needs to prepare for the post-oil age, knowing that technological changes could significantly affect demand for oil even before reserves run out.
·         The report identifies four clear areas of comparative advantage for the GCC and outlines key trends in each sector over the next ten years: energy-intensive manufacturing, for example petrochemicals, plastics, and aluminium; mining and mineral-based industries; trade (wholesale and retail) and logistics (based on location and experience); and tourism, hospitality and aviation.
·         A great deal of attention is now being paid to “knowledge economy” investments, including efforts to develop biotechnology, healthcare R&D, software development, film and media and other high-tech or creative industries. These initiatives are important priorities for Gulf governments because they offer the prospect of attractive jobs for nationals. But they are not based on the region’s natural comparative advantage and they are not likely to be major drivers of growth within the next decade. Their success in the longer term will hinge on reforms in education.
·         The key success factor here is the progress of education reforms. The best-case scenario, as hoped for by policymakers, is that the GCC states will manage to convert their current tangible oil wealth into intangible human capital, by investing in the education and skills that are needed for a transition from economies based on the primary sector to more diversified economies with more value-added, skilled sectors.

·         Such a transition will be difficult and faces significant risks. It is not likely to be achieved within the ten-year timeframe covered by this report. But this overarching ambition will continue to shape policy over the next decade. It means that education will probably be the single most important economic policy issue for the GCC governments in the years to 2020.