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(originally published by Booz & Company)


A Growth Strategy for the Long Term

Finally, the region’s vast sovereign wealth funds are pursuing their own form of diversification on behalf of the countries they represent. Funds such as Bahrain’s Mumtalakat Holding Company, the Abu Dhabi Investment Authority, and the Qatar Investment Authority hold assets worth $3.5 trillion, according to economic consultancy Global Insight. Some of these funds are investing in Western banks and other foreign assets around the world, but those investments do little to change the structure of the Gulf-based domestic economies — which is where change needs to begin.

This is not to say there hasn’t been any progress. In Saudi Arabia, for example, manufacturing grew as a percentage of GDP at rates of about 5.4 percent annually from 1991 to 2008. As a result, manufacturing and industrial activity per capita have surpassed the $900 mark, bringing Saudi Arabia’s manufacturing sector more in line with those of emerging economies such as Brazil.

Dubai has seen more than twice as much growth in its non-oil sectors as it has in its modest oil sector. Tourism-related service sectors account for more than 25 percent of economic output. Abu Dhabi, the largest of the seven emirates and the main exporter of oil, is earmarking sizable funds and directing them toward the establishment of capital-intensive, export-oriented industries. It is developing large industrial zones and establishing capital-rich national champions in aluminum, steel, and petrochemicals, and even innovation-based sectors such as aerospace, semiconductors, and renewable energy.

Obstacles to Diversification
But the majority of Gulf projects aimed at creating what we consider to be true diversification have not yet reached fruition. Saudi Arabia is currently attempting to develop a $30 billion industrial zone called Jazan on its Red Sea coast, which the government hopes will become home to hundreds of thousands of people. The development of this remote area is intended to create a mix of industries meant to diversify the Saudi economy.

Yet Saudi contractors and producers of building materials are having trouble keeping up with demand, which could slow construction. The infrastructure to deliver electricity is still being developed, so there is concern about whether there will be adequate supplies of energy. And ultimately, there is the question of skilled labor: Thousands of workers will probably have to be imported from Pakistan, India, and China.

This project exemplifies a deeper challenge for the Gulf states — addressing pervasive structural gaps. It is unclear whether enough capital and labor are being routed to productive economic sectors, such as manufacturing, as opposed to so-called support sectors, such as construction and real estate, infrastructure, and logistics, to which abundant resources are being channeled. In the world’s most successful economies, capital and labor tend to be balanced across a variety of sectors. In Gulf countries, however, this is not the case. Employment, for instance, is distributed quite unevenly: The oil and gas sector, which produces 47 percent of the Gulf’s GDP, provides work for only 1 percent of the region’s employed population. The vast majority of the workforce is employed in sectors that are relatively less economically productive and of secondary strategic importance in sustainable development.

At the same time that the Gulf states need human capital to advance their diversification efforts, they have double-digit rates of unemployment. This situation is expected to worsen as a substantial segment of the population reaches working age in the near future and pours into the job market. The root of the problem is that the available workers do not have the skills, knowledge, or motivation needed to match the available jobs. The Gulf’s economic diversification must include the development of its labor pool, which will entail increasing education levels as well as importing skilled talent.

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  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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