GCC countries are on the right track to achieve a balanced level of economic diversification. Investment in quality education and physical infrastructure might not lead the region to be the next world’s warehouse but are contributing to bring a breath of dynamism to these countries’ economies.
The campus is understated, more suburban mall than institute of higher learning, and the enrolment is thoroughly cosmopolitan. Its ten thousand students come from 202 countries – more, its administrators like to point out, than there are members of the United Nations. Between classes, students gather at the Starbucks cafe or catch up on assigned reading in the commons. Not far away, construction workers ready another block of dormitories for an incoming class of freshman.
It is an odd setting in a region associated more with oil derricks than mortarboards, but Dubai International Academic City represents a fresh coordinate in a slowly diversifying Arab economy. Occupying some 25 million square feet of prime real estate in Dubai, it is one of the largest clusters of foreign and regional universities in the Arab world, with classes offered by such institutions as Michigan State University and Australia’s University of Wollongong. By the time of its scheduled completion in 2015, the $3.2 billion complex expects enrolment to reach 40,000 students.
Higher education centres like DIAC represent the kind of service-sector enterprise that planners hope will one day create enough wealth to offset the Arab world’s critical dependence on energy for growth. In nearby Abu Dhabi, the Masdar Institute of Science and Technology, with the help of its partner, the Massachusetts Institute of Technology, is marketing itself as a powerhouse for research and development. Then there is Saudi Arabia’s King Abdullah University for Science and Technology, which opened in September with an endowment of $10 billion, 800 students and a mission to establish itself as a world-class postgraduate institution in a country with no real tradition of one.
So starved is Saudi Arabia for managerial expertise that in its first year KAUST will be run by Saudi Aramco, the kingdom’s energy giant. It is an apt pairing. Not only does Aramco symbolize the desert kingdom’s dominance in hydrocarbon fuels, it is also one of the most respected service-sector companies in the Arab world. For the Gulf states to successfully diversify their economies, experts say, they would do well to concentrate on service-related enterprises like education and other so-called “non-tradable” industries that are most likely to attract first-time job seekers.
“They will have to invest in skills and education,” says Uri Dadush, director of the international economics program of the Washington-based Carnegie Endowments for International Peace. “The question for them is not export diversification as much as jobs, which means economic diversification through non-export-related services. There is a market for education, but also for construction, wholesale businesses and restaurants.”
Diversification of any kind has been an elusive goal in a region where cushy public-sector positions are still regarded as an entitlement. Most of the labour in the Gulf emirates, from construction and domestic work to white-collar professions like teaching and health care, are provided by expatriates who remit much of their earning back home. Educated emirates, in contrast, tend to gravitate to the civil service, with its relatively shorter hours and generous pensions.
As a social contract – the state as the employer of first, and often last, resort – worked fine until the oil boom of the 1970s collapsed into a prolonged economic drought, compelling many guest workers to return home and rendering much of the Gulf economy inert. Previous attempts among the Gulf states to subsidize their way out of their oil dependency fizzled due to a failure of will, followed by a recovery in oil prices that allowed regimes to put off the pain of substantial reform. The result was a cascade of boom-bust cycles and dizzying levels of public debt.
What inspires cautious optimism about this most recent initiative is the breadth and scope of the commitment to change even as oil prices remain well above $50 dollars a barrel, the average rate assumed by Gulf states in their 2009 budgets. While the developed world continues to reel from the 2008 credit collapse, much of the germinal Middle Eastern economy has emerged more or less intact. The outlook for the Gulf is particularly bright; according to a recent report from the Economist Intelligence Unit, regional growth is expected to outstrip the global average, with an annualized rate of 4.5 percent over the next decade. While energy production will continue to dominate the economy, it will likely account for a declining share of growth. From 2002-2006, non-oil related commerce outpaced energy as a source of revenue in every Gulf state except for Saudi Arabia, which the ratio was nearly balanced, though oil revenue still accounted for 86 percent of the total.
Gulf regimes seem to have learned from their past mistakes. Since 2003, when the botched U.S.-occupation of post-invasion Iraq drove petroleum prices to record levels, the oil-producing countries of the Middle East have amassed estimated budget surpluses of $605 billion. Unlike previous boom cycles, when windfall profits were ploughed into hastily planned property developments or trophy assets overseas, Arab oil giants have taken advantage of this most recent bull market to right their balance sheets and invest in new infrastructure.
Bahrain, which possesses only modest petroleum reserves relative to its neighbours, is generally thought to lead the region in economic diversification. Its financial sector remains among the region’s most prolific, foreign investment has risen in response to business-friendly reforms, and the government hopes to double household income over the next two decades by investing in high-tech industry, public transportation, and education. Qatar, with its vast gas reserves, has emerged as a beacon for regional and international bankers, and such financial institutions as UBS, State Street, and Sumitomo Mitsui Banking Corp. are now licensed in Doha. Goldman Sachs is advising the government on several planned corporate mergers in the shipping and property markets, part of a plan to enhance market efficiency.
Saudi Arabia, perhaps the least patient of the Gulf states with its petroleum habit – and saddled with an estimated 15 percent jobless rate – has earmarked several sectors at once for development. The government is spending a fortune to mine its considerable and largely untapped mineral resources while laying down a railroad grid that will link its coastal and inland cities for both passenger and cargo traffic. It has also opened service sectors like finance and aviation to both local and foreign investors.
Most significantly, Riyadh is leveraging the generous concessions it obtained as part of its 2005 admission into the World Trade Organization to establish itself as a fiercely competitive petrochemical producer. Under the terms of its entry, Saudi Basic Industries Corp. is allowed to buy oil from Saudi Aramco at non-market rates, which gives it a huge advantage over such rivals as Germany’s BASF. While the industry itself is hugely capital intensive and creates relatively few jobs, Saudi economic planners hope its cheap raw materials will compel manufacturers of goods with a high plastic content – casings for televisions for example, or tires of auto vehicles – to locate factories in the kingdom.
No one is suggesting the Persian Gulf will one day become a beehive of heavy manufacturing. The region faces serious challenges on several fronts, including an exchange rate system that is linked to the U.S. dollar, which restricts monetary policy flexibility and threatens asset inflation in the current low-interest rate environment. With global growth expected to come from the developing world for at least the next generation, however, emirate leaders can reasonably assume a robust and sustained demand for oil and gas, the region’s lifeblood. They have demonstrated the will and the vision to go beyond oil. The challenge now is to fuel enough service-sector activity to accommodate young jobs seekers in both numbers and aspiration.
By Stephen Glain
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