EY - Growth Drivers: Digging beneath the surface

Digging beneath the surface: Is it time to rethink diversification in the GCC?

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EY - GCC diversification compared with other groupings (2012)

The twin pressures of declining oil revenues and the need to create jobs have increased the urgency of diversification. But if the Gulf countries are to catch up to other high income economies, they will need to rethink their approach.

Our Growth Drivers report shows that if the region were to catch up to the average OECD level of diversification, the GCC would gain an extra $17.7 billion.

We benchmarked the Gulf Cooperation Council (GCC) countries both globally and against each other using the EY Diversification Tracker. Our tool provides a standardized basis for assessing the degree to which economies have moved away from dependence on oil and gas. It also allows us to examine how this relates to economic growth.

We also looked at the impact of diversification on different sectors. In addition, we focused on the factors that would facilitate the emergence of a dynamic and competitive private sector, while creating jobs that meet the aspirations of nationals.

Finally, we highlighted the key steps for governments and business to consider to drive forward diversification in their economies.

Digging beneath the surface [ play video ]

Gerard Gallagher and Michael Hasbani discuss the findings in our Growth Drivers report

EY - Benchmarking the GCC

Benchmarking the GCC

We have created the Diversification Tracker, which focuses on the following three aspects to benchmark the GCC countries both globally and among themselves:

  • export complexity
  • the share of the non-oil sector
  • private versus public sector spending

These three values have been combined to give a percentage of diversification relative to the highest global performer.

Within the GCC, there is a very wide range of scores.

EY - Speeding up the pace

Speeding up the pace

To speed up the pace of diversification, the GCC needs to focus on three key accelerators:

  1. It is vital to help young nationals aim for jobs in the industries of the future.
  2. Make it easier for foreign companies to bring their capital and expertise to the GCC.
  3. Implementing existing plans for shared infrastructure and collective visas would aid diversification everywhere.

Gerard Gallagher, Managing Partner, MENA Advisory Services

  • Rethinking Diversification: the sector dimension
  • Standing on their own feet
  • Multiplier impactEY - Multiplier values and number of sectors impacted
    Sectors do not exist in isolation. If banks or telcos fail to develop, they hold back the rest of the economy. If they become pioneers, they can take other businesses with them. The best drivers of diversification, therefore, are those that have the strongest links with the rest of the economy – enabling other sectors to develop and drawing heavily on domestic goods and services, not just on imports.
  • Jobs for nationalsEY - Nationals employed by sector in Saudi Arabia, 2013
    Diversification does not automatically create jobs that are viable substitutes for public sector employment but it will have to focus on doing so in order to absorb the growing number of young nationals entering the labor market.

Many of the Gulf countries have developed innovation ecosystems, encouraging technical research and entrepreneurship. But education and innovative initiatives will not be enough on their own. As we argue in the recent report. How will the GCC fill the skills gap?

Training, work experience and closer private sector involvement in education will have to become a vital part of diversification.

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Rethinking Diversification: the sector dimension

Diversification efforts have relied heavily on governments recycling oil and gas revenues via the budget and public investment entities in the past. Now money is tighter and the urgency of diversification greater. There are three factors to consider in determining what strategies are most appropriate in each country:

  1. Which sectors have the most potential to stand on their own feet, without relying for the long run on government spending, subsidies and other support?
  2. Which sectors are likely to have the best linkages with the rest of the economy?
  3. Which sectors can create jobs that are substitutes for public sector employment for Gulf nationals?
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Standing on their own feet

Government spending has been instrumental in developing a broad variety of sectors in the GCC. Read the full Growth Drivers 2.0 report

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Financing diversification

Could sovereign wealth funds enable faster progress?

During the oil boom of the past decade, the Gulf countries invested significantly more public money into their economies than in the 1970s. Budgeted capital spending was eight times higher in 2013 than in 2001. Additional public investment came from sovereign wealth funds and state-owned enterprises.

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The next decade

The combination of lower oil prices and accumulated reserves creates a window of opportunity to refocus on speeding up the pace and adjusting the direction of diversification to ensure that Gulf countries remain secure and prosperous.

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The dollar value

How much bigger might the GCC economy be if the entire region were to shift from todays 38% to reach the 65% diversification level found in the OECD?

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