Middle Eastern countries are known for their dependency on oil and gas to support their economic growth. Over recent decades, the Kingdom of Saudi Arabia, Kuwait, and the United Arab Emirates have seen exponential growth in their economies. However, despite their phenomenal record of growth – this growth has come at the cost of lacklustre economic diversification
Middle Eastern countries are among the world-leaders in terms of GDP per capita. The GDP/capita of Saudi Arabia, Kuwait, and the United Arab Emirates between 2011 and 2014 was $52k, $73.2k, and $67.7k respectively1. This puts these nations in the Top-10 of the GDP per Capita rankings. In the report, Research and Markets: GCC Oil and Gas Industry Overview 2013, Laura Wood, senior manager from Business Wire said “The Oil industry continues to form the backbone of these economies, accounting for more than three fourths of government revenues”. As a result of this growth, these nations have had the means to make investments in initiatives to foster the creation of a modern economy and society. However, are these economies on right path to being considered either modern or developed?
Despite their investments and a myriad of initiatives, it is evident that most of these nations’ institutions have fallen into marginal thinking – trying to make their oil assets sweat instead of investing in nascent disruptive industries. The high oil prices of the last decade created an inefficient Pavlovian private sector reliant on subsidies. This is now changing. Middle Eastern businesses are being forced to innovate. Tarek Al Sultan, CEO of a leading Middle East logistics company Agility, highlighted a reasonable approach to embrace change and innovate. He mentioned that: “Companies can’t avoid changes, they need to embrace them… It’s clear to us that as a business we need to change, and we need to change quickly. We just have to make sure we don’t, at the same time, throw away the business that we have.” To achieve that one has to “create a separate division or spin off company to explore potentially disruptive new products or processes on a smaller scale.” This culture of embracing innovation needs to be adopted in the public and private sectors across the region.
Nonetheless, shifting away from the Oil and Gas economy is not a simple task. The resource curse is hard to break. It takes time to create the right economic environments – assigning budgets, initiatives, resources, and people. Even more challenging is the requirement to build institutions that support the oil economy whilst incentivising investment away from the oil economy. GCC nations have started to look at models of disruption. John Mickleethwait said in Bloomberg concerning Saudi Arabia’s plan to create a $2 Trillion Megafund for Post-Oil Era that “Saudi Arabia is getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets.” To be successful Middle Eastern economies will have to make bold bets on disruptive energy sources and new sources of economic development. Export diversification takes a long time – is it too late? Have low oil prices produced enough of a shock to the institutions of the Middle East to incentivise change? Are the societies of the region able to keep up with the demands that a competitive future brings? Where should these countries and their institutions look for economic models to see them through the coming decades years?
If Middle Eastern oil economies are able to weather the storm – they will prove the adage that – “the cure for low oil prices was low oil prices”. If only because of the behavioural changes low oil prices have forced on the region.
Next article: A disruptive strategy for diversification.
1 The World Bank GDP Study
Author: Abdullah Abdulrahman