x Abu Dhabi, UAESunday 23 July 2017

A well diversified economy requires a regional touch

An economic diversification based on existing industrial infrastructure can be best suited to the UAE.

Economic diversification is high on the policy agenda of GCC countries, evidenced by the billions of dirhams earmarked for that goal. Like elsewhere, the urge for economic diversification in the GCC is driven by the desire to lessen economic dependency on any particular industry, especially the oil and gas industry.

This concern is widely shared among small countries that are very cautious not to fall prey to the "banana republic" syndrome, that is becoming overly dependent on the export of a single product or tormented by the booms and bust of natural resources revenues.

Nonetheless, economic diversification is an undertaking that is both costly and risky. Stories about the failure of massive projects aimed at the creation of new industries in specific regions and in targeted fields are abundant. It is the frequent failure of such projects - in Latin America, India and Turkey in particular - that has led much of the world to lose interest in "industrial policy" as an instrument of economic development.

Economic diversification can be broadly classified into two groups. Firstly, there are the countries that have successfully diversified their economies by becoming homes for manufacturing and outsourced services. These are countries like China, Indonesia, Mexico and Vietnam among others.

The second group include countries that have managed to diversify by upgrading their existing industries and introducing new products and services into new markets. Examples in this group include Brazil, Chile and Malaysia.

The latter group adopted a less risky approach to diversification by considering the relatedness of existing infrastructure and natural advantages to new economic activities. And it is an approach that might serve GCC countries well.

Using existing industries as a starting point can narrow the trial and error range and reduce the cost of failure by using existing infrastructure and available resources. Such an approach has helped make Brazil, for example, one of the world's largest producers of ethanol, which was based on their already existent sugar industry.

As the Brazilian government found, it is often more effective to choose new industries for which a country has natural advantages like environment or location.

Another successful case of economic diversification within existing industrial structures is the Chilean salmon industry.

Chile is currently the second largest producer of salmon in the world, despite the fact that salmon is not a local fish. This goes back to its existing legacy as a fishing nation thanks to the country's long coast. However, the traditional Chilean fish industry was aimed merely at local consumption. The industry had small space for mass production, let alone export.

But the government eventually sought to diversify the economy by leveraging Chile's geography. It identified the advantage of the Chilean cold water and long coast by introducing salmon. The species was already produced for export in many countries such as Norway and Finland. Soon, Chile became one of the largest salmon producers in the world.

A similar story of diversification based on existing industrial structures can be found on the other side of the world, in Malaysia. Its climate and abundance of water resources enabled it to become a major producer of rubber. However, a fall in rubber prices pushed the country to diversify its agricultural production.

An agricultural diversification programme was introduced by the Malaysian government in the 1960s to reduce the country's economic overreliance on rubber and tin. This resulted in the introduction of oil palm, which was based on the country's pre-existing experience from the long history of growing rubber trees. In a short time, palm oil became a major product in the Malaysian economy; Malaysia is now a world leader in the use of palm oil in a wide range of industries, including biofuel and pharmaceutical glycerine.

These three examples show that diversifying an economy can happen within existing industrial structures. Furthermore, new industries are born with the immediate advantage of being able to tap into existing pool of resources, supply chains and infrastructure.

In the GCC, the long history with the energy sector as well as the construction sector provides a basis for many new industries. Most prominently, given the region's development in green technology research, green construction seems to be a smart direction.

This region has a clear demand for reduction of energy use in buildings, and the region's rapid urban expansion could provide a high demand for green construction research, which could accelerate the development of green building technologies.

The UAE has already taken steps in this direction, introducing its "Estidama" (Arabic for sustainability) rating system in Abu Dhabi. Qatar has a similar system with its QSAS sustainability rating programme.

Nevertheless, there is need for further advocacy of the green construction industry by the public sector. Hence, introducing supportive policies and creating effective facilitating bodies can be fundamental in providing momentum to the green construction industry, making the GCC region the pioneer in future buildings field.

 

Dr Sami Mahroum is director of the INSEAD Innovation and Policy Initiative in Abu Dhabi. Mohamad Fakhreddin is a research fellow at the policy initiative