Drilling for New Sources of Growth
How members of the Gulf Cooperation Council can diversify their economies.
A version of this article appeared in the Winter 2016 issue of strategy+business.
For the past few decades, economic diversification has been high on the agenda of all the countries in the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). Even before oil prices dropped in mid-2014, their leaders recognized that their economies relied too heavily on the oil and gas industry. Nonetheless, although the share of non-oil GDP has steadily increased in each of these countries, their exports and government revenues remain concentrated on oil and gas. Returns from these sources have long funded spending on infrastructure and social services and paid public-sector wages. The drop in oil prices has thus resulted in a fiscal crunch, adding urgency to the need to transform.
GCC leaders already know that economic transformation is not a simple undertaking. It requires a holistic approach incorporating a variety of measures. For example, Saudi Arabia’s Vision 2030 — a sweeping diversification blueprint sponsored by Deputy Crown Prince Mohammed bin Salman and released in April 2016 — aims to rebalance the Saudi economy away from oil. It sets ambitious goals for the next 15 years: to increase the share of non-oil exports from 16 percent to 50 percent, and to raise the private sector’s contribution to GDP from 40 percent to 65 percent. Such comprehensive plans are critically important not just for economic growth, but also for the ambitions of millions of young people in the region.
As they implement measures to see their strategies through, GCC countries should keep in mind three key principles. The first is upgrading the strategic management of local enterprises so these organizations become world-class. The second is using digitization to leapfrog over the early stages of economic development. The third is building a skilled and “future-proof” labor force that is capable of continuous learning.
As John Jullens, a leading PwC commentator on emerging economies, points out, one of the best — yet often overlooked — ways to improve any economy is to develop the effectiveness of local company management. Even though some of the GCC’s members have used their oil wealth and other advantages to foster economic growth, they still need more companies that can compete on a global scale. By promoting disciplined strategic management, these governments could help develop world-class companies within their borders. This would foster more vibrant industries, promote local content creation, spawn advanced technologies and innovation, and provide new high-paying job opportunities.
Until now, many GCC companies have benefited from top-line growth in their expanding local markets. They have also relied on country-specific competitive advantages, such as access to cheap natural resources and expatriate labor. This has often allowed them to avoid laying the foundations for global competitiveness or developing their capacity for innovation. But those past advantages are already eroding, and the GCC must rapidly develop the ability of its companies to compete.
This requires a two-pronged approach. As an initial step, GCC companies need to build the kind of distinctive capabilities that set them apart from others. A distinctive capability is a complex, cross-functional combination of processes, skills, knowledge, tools, and organization design — all put in place to reliably and consistently deliver a strategic outcome. To build and deploy these capabilities, companies often have to rethink the way they do things: improving their operating models, process design, use of technology, and human resources practices. A great capability in delivering customer satisfaction, for example, requires employees at every level who can make decisions on behalf of their customers without waiting for approval. This means giving employees a high level of autonomy, even if it feels unfamiliar at first.
Next, many of the region’s companies — especially those whose governments retain large ownership stakes — need better governance systems. The GCC includes about 650 state-owned enterprises, and the state is a shareholder in 78 of the top 100 listed companies on GCC stock exchanges. As an owner in many of these companies, a GCC government often has considerable influence on board member selection and should secure the right composition to develop and implement an effective corporate strategy. Board members should be aware not just of finance and government concerns, but also of the relevant business, technology, and human capital issues that will determine success. Governments can also benefit from establishing a centralized ownership agency through which they can exercise their ownership rights in enterprises more effectively and transparently.
Digitization, or access to advanced computer and information technology, has become the single most important enabler of innovation, competitiveness, and economic growth in emerging economies. GCC countries are poised to succeed in these areas because they are relatively unbound by legacy systems. They can spring over traditional stages of economic development by adopting leading-edge digital technologies such as cloud computing systems, data analytics, integrated digital operations (in which separate systems work seamlessly together), and advanced user interface design.
Leapfrogging digital technology this way can speed economic transformation considerably. In healthcare, for instance, many GCC countries are considering the implementation of national electronic health records, a process that ordinarily takes years. But they can take advantage of the fact that they lack a legacy system, and design a state-of-the-art system from scratch. The system could incorporate advanced analytics — storing, sharing, and analyzing health data in the cloud — which would bring various benefits, including treatments tailored to individual patients and improved monitoring of warning signs for early disease prevention. GCC leaders can also adopt blockchain, a recently developed technology that uses a public ledger system to securely record and transfer health data with a much lower administrative burden.
Estonia represents a model of digital leapfrogging that GCC countries might follow. Beginning in 1992, after the collapse of the Soviet Union, Estonia began changing from a struggling economy with antiquated technology to a global digital leader. The country capitalized on its educated workforce to build a strong skill base in computer and IT management. Rather than adopting systems that would soon become obsolete, Estonia went straight for the latest technology. This required avoiding the trap of legacy thinking, and embracing the Internet as a vehicle for the government’s operations (putting in place, for example, one of the world’s first paperless land registries).
Estonia represents a model of digital leapfrogging that GCC countries might follow.
Estonia currently has one of the most advanced e-government systems in the world. This includes a single digital ID that enables citizens to access all of its secure services. Estonia has used its digital strategy to establish a global reputation for technological leadership and business dynamism. It produces more startups per person than any other country in Europe and offers an e-residency program to entrepreneurs worldwide so they can establish businesses in the country without physically moving there.
An Estonia-style approach in the GCC would involve building digital ecosystems in which innovation can thrive. This would require investing in smart infrastructure, platforms, and services; making key data sets open and publicly available; upgrading the legal and regulatory framework; and nurturing digital talent. Dubai has already begun moving in this direction. Its 3D printing strategy, launched in April 2016, aims at positioning the emirate as a leading hub of the technology focused on three key sectors: construction, medical products, and consumer products. By the year 2030, it expects 25 percent of its buildings to be 3D printed. Other GCC countries, including Saudi Arabia and Qatar, are taking tangible steps to develop national information and communications technology strategies.
The Future-Proof Workforce
Developing a capable and flexible workforce, one that learns continuously and can adapt to any technological future, is a critical enabler and vital resource for any economic transformation plan. World-class companies need skilled employees who innovate and take risks. Because they cannot afford to ignore sources of skilled talent, GCC governments should heighten their efforts to integrate women and young people into the labor market and introduce further incentives to get nationals to work in the private sector. More importantly, they should invest in reskilling and retraining their workforce.
Bahrain, Qatar, Saudi Arabia, and the UAE have fostered economic growth, but they need more companies that can compete on a global scale.
At present, too many people do not even participate in the economy. Their “idle” status means they are not active in employment, education, or training. Women and young people — totaling 60 percent of the eligible population — have the lowest participation rates. In Saudi Arabia, for example, a quarter of the youth population is idle. GCC governments can help get them into work by encouraging digital entrepreneurship, particularly through social media platforms. Already these platforms are hosting a rising tide of entrepreneurs and startups from the region — such as women’s Instagram businesses in Saudi Arabia. Governments can also help women by discouraging attitudes that make it difficult for them to work, and putting in place flexible employment models that make it easier for them to keep their job.
Governments also need to encourage nationals to join the private sector, which is currently dominated by expatriates. New policies should gradually decrease the attractiveness and availability of public-sector employment, for example, by closing the gap between public-sector and private-sector wages to incentivize nationals to join private companies.
Another gap exists between the current technological and managerial skills of many GCC nationals and the skills increasingly needed in business today. According to a recent World Economic Forum report, the GCC employment outlook in professional services and public administration — currently the largest pool of jobs for nationals in the region — is now negative, whereas fast-growing areas such as digitization face a shortage of skilled labor. Companies in the GCC already seek employees skilled in information security, programming, and user experience and interface design. Job postings for these digital skills on LinkedIn represent 10 percent of overall job postings in the GCC, which is higher than their 7 percent share in the U.S. job market.
If ignored, this skill gap will widen, and the best way to address it is through short- and medium-term training initiatives designed to address current labor market needs quickly. The educational reforms that GCC countries have generally embraced are still important, but they can take decades to have an impact. New, urgent initiatives should focus on targeted vocational education and training, ideally in collaboration with companies and academic institutions.
All three of the principles discussed above have one premise in common: The present fiscal crunch is an opportunity for GCC governments to transform their economies. With a shift in attitude toward how to diversify — by embracing the goal of world-class companies, emphasizing digitization, and creating a capable workforce — GCC countries can lower their dependence on commodities. They can instead move into the future as balanced, stable economies enjoying sustainable growth.
Reprint No. 16404
- Samer Bohsali leads the Middle East digital business and technology practice at Strategy&, PwC’s strategy consulting practice. He is also a leadership member of the public sector practice in the region.
- Per-Ola Karlsson leads the organization, change, and leadership practice in the Middle East for Strategy&. His main areas of expertise are strategy formulation, organization development, corporate center design, and governance.
- Rawia Abdel Samad is the director of Strategy&'s Ideation Center, a leading think tank in the Middle East.