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Published: August 26, 2008

 
 

A Growth Strategy for the Long Term

Economies that depend primarily on a single resource are exposed to ongoing shocks, but an export-based diversification strategy can alleviate the tremors.

Hundreds of billions of dollars have been flowing into the oil-producing nations of the Gulf Cooperation Council (GCC), but one of the most important policy debates — how to transform that wealth into sustainable long-term economic development — is just beginning in earnest. It’s a debate that has broad relevance not just for the Middle East, but for all the world’s large oil producers, such as Russia, Nigeria, and Venezuela. It also applies to other single-resource economies such as Zambia, which depends on copper, and Botswana and Namibia, which rely on diamonds.

Should such countries diversify their respective economies beyond these mainstays, they would be more protected from the exogenous shocks related to a single industry. Furthermore, they could become important competitors in sectors from polymers to semiconductors to aerospace, transforming both their own economies and the global playing field — creating competitive threats as well as opportunities for suppliers, partners, and service providers.

But the heart of the issue is just what “economic diversification” really means. Countries dependent on a single resource are often prone to developing industries only a step or two removed from that original source of wealth. This may mean building out an oil industry into petrochemicals, for instance, or creating a shipping and logistics industry that relies, at least initially, on exporting the country’s dominant resource. Instead, countries should seek to build broad, export-based economies that are not subject to shocks from one industry or group of industries. In developing their plans for economic growth, countries should target industries that create wealth and jobs and that encourage the development of new knowledge and technology. By focusing on this goal, single-resource nations would escape their existing model, in which they merely export raw materials, earn capital, and then spend portions of that capital on imported goods and services.

With oil and natural gas prices so high, it may seem an odd time to be concerned about diversifying away from these commodities. But the aim of economic diversification is to move beyond using GDP as the primary measure of a successful economy. Instead, countries should be asking themselves whether the components of their economy — their exports, investments, human capital, technology, and knowledge — are varied, established, competitive, and flexible. The models for successful diversification are Norway and, to a certain extent, Canada, which have broadly mixed economies despite having large energy-related sectors.

So far, however, governments and policy makers in many countries that have traditionally been dependent on a single resource have taken only the initial steps toward true diversification. Take, for example, the Gulf region, with its economies that have always relied on oil: Saudi Arabia has long pursued downstream diversification, meaning that the government has invested in refining, petrochemicals, and plastics, most recently by acquiring General Electric’s plastics division; the chemicals and plastics industries constitute more than 70 percent of the country’s total non-oil exports. But Saudi Arabia is still vulnerable to cyclical downturns because all of this activity is directly related to petroleum.

Another type of diversification has been to move into sectors equally as turbulent as oil, such as shipping and logistics, real estate development, and tourism. The Gulf region is witnessing a spectacular burst in spending on tourism in particular: Dubai, one of the United Arab Emirates, plans to spend US$350 billion over the next dozen years to build a ski resort, a virtual-reality time-travel amusement park, and a Jurassic world populated by robotic dinosaurs, among other attractions. The hydrocarbon-rich emirate of Abu Dhabi is seeking to become a world cultural destination, with projects such as the construction of a Guggenheim Museum. Yet this type of economic development also suffers from a strategic vulnerability — you can build it, but what if they don’t come? Tourism is particularly vulnerable to shifts in perception, consumer confidence downturns, and travel costs.

 
 
 
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Resources

  1. Rabih Abouchakra, Chadi N. Moujaes, Mazen Ramsay Najjar, and Richard Shediac, “Economic Diversification: The Road to Sustainable Development,” Booz & Company white paper, February 2008: The article on which this piece was based provides more detail on diversification initiatives in the Middle East.
  2. Stefania Bianchi, “Dubai’s Next Big Niche: Theme-Park Destination,” Wall Street Journal, June 24, 2008: One facet of the emirate’s plans to develop as a tourist attraction. Subscription required.
  3. Natasha Brereton, “Bahrain Fund Looks Abroad for Growth,” Wall Street Journal, July 10, 2008: Analysis of sovereign wealth funds in the Gulf and their plans to invest abroad. Subscription required.
  4. Nabih Maroun, Hatem Samman, Chadi N. Moujaes, and Rabih Abouchakra, “How to Succeed at Education Reform: The Case for Saudi Arabia and the Broader GCC Region,” Booz & Company white paper, March 2008: Examines how the education sector in the Gulf must be revamped to meet the region’s needs for growth.
 
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