Dubai shows way to diversify economies
Dubai and Norway are being held up as examples of how the GCC nations can successfully diversify their economies.
In a report, Bank of America Merrill Lynch (BAML) suggested that following the path of those economies by focusing on higher value-added sectors and reforms could raise GDP in the region by 1 to 1.5 per cent.
The advice to speed up diversification comes as oil revenue for most of the GCC is expected to fall short of last year's gains as crude prices have slid. The oil sector accounts for about 30 per cent of GDP in the GCC on average.
"Since the 1970s, the economies of the GCC have been exposed to volatility because of swings in oil prices, and we can see that going on unless diversification is stepped up," said Jean-Michel Saliba, a Middle East and North Africa economist at BAML global research. "Dubai started diversifying in the 1980s, and look where it is now."
As the GCC's most open economy, Dubai was heavily rocked by the global financial crisis that began in 2008, with a property downturn and soured global investments triggering debt restructuring at several government-linked companies.
But the emirate's reliance on non-oil trade including transport and tourism helped it to rebound, and it is tipped by officials to achieve growth this of year of 4.5 per cent.
Within the region, Dubai could prove a "long-term winner", benefiting from continued population growth and its past infrastructure investment, BAML said.
Norway has already been used as a role model in diversification by Abu Dhabi within its 2030 Economic Vision. Both economies are blessed with oil, but Norway's output stems from a wider mix. Abu Dhabi has taken steps to move in a similar direction in recent years by expanding infrastructure, expanding its industries and building a financial centre.
"Norway is the same size [population-wise] as Abu Dhabi and is the obvious model as they both have oil," said Mr Saliba. "Abu Dhabi has the muscle, but it's just a question of how it deploys it."
BAML said the GCC could learn from Norway's example in several ways: first, Norway's emphasis on an early building of human capital by investing in education, raising labour force participation and supporting productivity growth. Human capital now accounts for 82 per cent of Norway's national wealth compared with just 7 per cent for petroleum.
Second, Norway has also developed its export base away from only oil and gas. It is also the second-largest exporter of seafood, the sixth-largest exporter of aluminium and the leading exporter of sub-sea technology and products.
In contrast, the GCC's development since starting to amass revenue from oil exports in the late 1950s has been heavily labour and capital-intensive.
The next step for the GCC was to create a self-sustaining non-oil economy less dependent on fluctuations in oil prices, the report said.
"This will require the attraction and retention of white-collar workers, steady progress on institution-building, education and business climate reform to overcome structural rigidities," it said.
The UAE is gradually taking steps to reform its business climate. A new companies law is in the pipeline, which opens the door to what many foreigners have been seeking for decades - a potential easing of ownership rules for international companies in certain industries. A draft bankruptcy law designed to support struggling companies should come into effect by the end of the year, say officials.
Updated: July 11, 2012 04:00 AM