arab world competitiveness report 2007. part 10/11

CHAPTER 3.1

The Gulf Cooperation Council(GCC) Countries and the World:Scenarios to 2025: Implicationsfor CompetitivenessNICHOLAS DAVIS, World Economic Forum

CHIEMI HAYASHI, World Economic Forum

The World Economic Forum has developed three sce-narios for the future of the Gulf Cooperation Council(GCC) countries to 2025.1 From the underlying modelsof economic, social, and political development used tocreate the scenarios, it is possible to derive forces thatwill shape the economic environment of the GCC andassess their implications for the competitiveness of theGCC countries over the next 17 years.This chapterintroduces the three scenarios for the region from 2007to 2025 and examines their implications for the futureof the GCC countries competitiveness.

What are scenarios?Scenarios are stories about the future. Leading globalcompanies often engage in constructing large-scale sce-narios to help formulate their business and investmentstrategies. Scenarios enhance the robustness of strategies,allow better strategic decisions, raise awareness of theexternal environment, provide impetus for currentaction, and increase the speed of response to unexpectedevents.The World Economic Forum produces a diverseand wide-ranging set of scenarios as part of the WorldScenario Series. Previous projects include scenarios forIndia, Russia, China, the Digital Ecosystem, andTechnology and Innovation in Financial Services.

Good scenarios are plausible, challenging, and rig-orously constructed to address the most critical ques-tions that decision makers need to face.The GulfCooperation Council (GCC) and the World: Scenarios to2025 were developed over a period of one year andinvolved workshops in Abu Dhabi, Doha, London,Sharm El Sheikh, New York, and Washington, DC.Theysynthesize the perspectives of many leaders in business,society, government, and academia from both withinand outside the GCC countries. Supporting analysis hasadded insights from multiple stakeholders, and theunderlying economic basis is backed by rigorous model-ing in conjunction with research partners of this project.

For a region as diverse as the GCC, no single set ofscenarios can claim to describe all possible futures. Eachstory that has emerged describes one of many different,plausible futures for the GCC countries. Importantly,they are not predictions but rather possibilities.They areintended to provoke readers, challenging their assump-tions about what may happen and providing a usefulshared basis for debate.

129

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

Notes:

The authors would like to thank Johanna Lanitis and Sandrine Perrollazfor their excellent research assistance.

The full text of The Gulf Cooperation Council (GCC) Countries and theWorld: Scenarios to 2025 will be available to Forum members followingits exclusivity period with our developing partners. For further informa-tion, please contact the World Economic Forum Scenario Team at [email protected].

part3.fin 3/22/07 12:14 PM 29

In developing these scenarios, the Forum closelyinvolved senior executives from leading global compa-nies, as well as thought leaders, scenario practitioners,and public figures.Together they identified the followingcritical questions:

• Will leaders in the GCC countries be willing andable to implement the necessary economic andpolitical reforms and enforce the rule of law, bothin public and in private governance?

• Can the GCC countries maintain internal orderand stability, in particular vis-à-vis a complex anduncertain regional situation?

Answering these questions in different ways provides thebasis for imagining different futures for the GCC coun-tries based on their progress in implementing economic,political, and social reforms and the various possibilitiesin terms of regional stability. Both questions are also ofvital importance for the evolution of national competi-tiveness and economic growth.

Key themes of the scenariosThe GCC countries have benefited enormously fromoil and gas reserves and assets that have generated signif-icant financial liquidity in the six years between 2001and 2007. Its present wealth poses an interesting questionfor those interested in the future of the GCC countries,and one that these scenarios seek to address: How canthis wealth be put to use to ensure that the GCC countries expand in affluence, and also ensure that theyovercome the internal and external pressures that couldshift them from the path of sustainable prosperity?In positing three possible futures that address these questions in different ways, two key themes consistentlyemerge as being crucial to the future of the GCC countries. Both of these directly and indirectly affect the competitiveness of the GCC countries:

• Education and innovation. The GCC countriesface the challenge that their collective oil reserves,although vast, will not last forever. Nor are oil andgas always a reliable source of wealth—there havebeen many times when GCC budgets were in deficitand public debt rose as a result of falling energyprices. However, in attempting to diversify awayfrom oil, the GCC countries face a major problemin that their existing skill base for workers is low byworld standards, and relatively little research, devel-opment, and innovation are occurring in the region.Data from the Global Competitiveness Index indi-cate that the region significantly lags behind in termsof education and innovation (see Chapter 1.1 ofthis Report for a more detailed discussion).Enrollment rates in educational institutions remain

low on average, particularly at the tertiary level, andthe quality of education is in need of upgrading. Inthe innovation category, all countries with theexception of the United Arab Emirates and Qatarrank in the lower half of the overall sample of 128countries.A closer look at the results points to theweak quality of local research institutions as well asshortages in qualified staff as the most importantreasons behind the lagging R&D performance ofthe GCC region.This creates an impediment todevelopment and exacerbates other problems asso-ciated with importing both foreign workers andtechnologies.As a result, the way in which educa-tion policies are handled by GCC governments willbe a significant determinant of the region’s abilityto develop as innovation-based economies that donot wholly rely on natural resources.

• Leadership and governance. The GCC countriesare ruled by traditionally organized family groups,with varying underlying executive, legislative, andjudicial models. Leadership and governance willtherefore be instrumental in determining the paththat the GCC countries will take over the next 20years.Although much is being undertaken today interms of reform to improve the efficiency andopenness of these systems, the strategies chosen andthe rates of change vary between GCC countries.In managing both internal stability and reforms, andthus in determining the structure and strength ofinstitutions, leadership plays a critical role at all levelsof GCC government as well as in the private sector.

Before discussing the scenarios and their implications indetail, it is useful to take a look at the competitivenesslandscape of the GCC countries that emerges in 2007.

Current competitiveness challenges in the GulfCooperation Council countriesThe results of the Global Competitiveness Index high-light a number of competitive strengths and weaknessesfor the five GCC countries it covers—Bahrain, Kuwait,Oman, Qatar, and the United Arab Emirates.The Indexassesses competitiveness of countries by looking at ninecriteria that affect competitiveness: institutions, infra-structure, macroeconomy, health and primary education,higher education and training, market efficiency, techno-logical readiness, business sophistication, and innovation.The average results in these categories are benchmarkedagainst Singapore in Figure 1.2

Not surprisingly, given the current surge in oilprices, members of the GCC display stable macroeco-nomic indicators. In particular, oil revenues combinedwith better fiscal management than in previous yearsfueled budget surpluses and enabled governments topartly repay public debt and increase national savings,

130

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

part3.fin 3/22/07 12:14 PM Page 130

but this also increased inflation. On average, countriesalso display well-run institutions with relatively wellprotected property rights and fairly low levels of corrup-tion. Businesses have trust in the honesty of politiciansand consider public spending to be well invested. Effortsto strengthen the financial sector have paid off in theregion, and financial markets display, on average, a fairlyhigh level of sophistication.At the same time, however,financial markets are not sufficiently geared toward fuel-ing entrepreneurship, and access to finance for localcompanies remains difficult in many countries, despitehigh liquidity levels.

In order to realize their full competitive potential,GCC countries should focus on strengthening the availability and quality of educational institutions at the primary, secondary, and tertiary levels, although theperformance on educational indicators among GCCcountries is very diverse. Some countries lag behind interms of primary education and display fairly high levelsof illiteracy, while other countries need to improve uni-versity education.A common problem that occurs acrossthe region, however, is that the educational institutionsdo not teach young people the skills necessary to succeedin the private sector.

In most GCC countries, more openness to domesticand international competition would benefit the econo-my.Also, the ability to adopt technologies from abroadand the capacity to innovate are on average limited.This is mainly because of the low quality of research

institutions, but also because of the scarcity of qualifiedstaff, such as scientists and engineers.

Overview of competitiveness aspects within the scenariosThree different paths for the GCC countries through to2025 are represented in Figure 2, displayed as movementsthrough a matrix defined by the key questions above.The resulting scenarios are called Oasis, Sandstorm, andThe Fertile Gulf.

OasisOasis describes a scenario where regional stability con-tinues to be a challenge for the GCC countries, whichare nevertheless able to achieve substantial institutionalreforms in an environment of relatively stable oil pricesthat have a floor of US$45 per barrel.The GCC coun-tries develop strong identities and work together tocoordinate diplomatic and economic policies throughtechnocratic governance and a strong internal market.Overregulation in world markets slows the process ofglobalization of the world economy to global GDPgrowth rates of 3–3.5 percent, affecting the GCC coun-tries; nonetheless, these countries are an oasis of stabilityand prosperity in an otherwise troubled region. By2025, the countries have all made significant gains interms of competitiveness, but have done so via a seriesof top-down reforms and industry policy rather than byfocusing on market liberalization.Thus, although health,

131

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

2

3

4

5

6

7

1

Institutions

Infrastructure

Macro-economy

Health andprimary

education

Higher educationand training

Market efficiency

Technologicalreadiness

Businesssophistication

Innovation

Figure 1: Results of the Global Competitiveness Index for Gulf Cooperation Council countries benchmarked against Singapore

Source: World Economic Forum.

*excluding Saudi Arabia

� GCC countries*

� Singapore

part3.fin 3/22/07 12:14 PM Page 131

education, and technology have improved substantially,there remain some elements of friction within institutionsand markets that are geared toward strategic priorities,and infrastructure investments occasionally suffer frompoor planning. Nevertheless, efforts to build the privatesector and improve the efficiency of the public sectorhave paid off in terms of increased business sophistica-tion and reduced costs of bureaucracy and corruption.

2007–12As tensions rise in the Gulf with regard to Iran andproblems persist with sectarian and insurgent violencein Iraq, a new regional body known as the GCCEconomic Coordination and Development Board progressively develops a coordinated regional economicstrategy to make the most of relatively high oil prices—the “Three Pillars” strategy—that aims at (1) encouragingpublic-private partnerships, (2) encouraging economicdiversification, and (3) improving governance throughstronger and more efficient institutions.There is a focuson building the private sector through targeted incen-tives for domestic and foreign investment, particularly intourism, business services, and energy-intensive industriessuch as petrochemicals, aluminum, and steel. Financialmarkets develop strongly, and there is talk of marketconsolidation following monetary integration in 2012.

The skills shortage begins to be addressed by edu-cational reform aimed at enhancing human capital instrategic sectors, improving public infrastructure acrossthe region, and implementing on-the-job trainingthrough appropriate training schemes.Training programsfor nationals in both domestic and international firmsare being funded. Because the strategy indicated thathigh-tech industries should be developed within the oiland gas sector, a public-private partnership to train localengineers has been established.At the same time, areview of educational standards across the six GCCcountries has been undertaken, and a plan for regionalaccreditation of universities has been put in place.Leaders have been encouraged to be role models forprivate-sector participation; the educational system has reinforced this message.Taken together, all this hascontributed to upgrading the image of the professionalworker and strengthened meritocracy among the work-force.The GCC region achieves over 5 percent realcompound annual growth for the period.

2013–20Nuclear proliferation causes regional concerns andincreases the volatility of the price of oil. Efforts toaccelerate economic diversification continue with strategic research and development (R&D) investments,

132

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

Figure 2: Gulf Cooperation Council scenarios to 2025

Source: World Economic Forum: The Gulf Cooperation Council (GCC) Countries and the World: Scenarios to 2025.

OasisSandstorm

The Fertile Gulf

Ineffective governance and reforms Effective governance and reforms

Regi

onal

inst

abili

tyRe

gion

al s

tabi

lity

part3.fin 3/22/07 12:14 PM Page 132

capturing more of the energy value chain and increasingthe world market share of associated industries.TheGCC countries work toward possessing some of theleading technologies for oil-field mapping and enhancedoil recovery.The push in R&D is leading to advances inchemicals and starting to spill over to plastics; the GCCis set to become home to a very successful cluster offirms specializing in advanced materials.Top-down economic reform is broadly successful, and—following a significant joint effort on the part of the countries’leaders—educational standards are established across the GCC countries to create a deeper regional labormarket.Another particular focus is the creation of publicaffairs management colleges to educate a generation oftechnocrats in order to increase the effectiveness of thepublic sector. Political reforms progress slowly, withpressures from local populations managed through acombination of financial incentives and partial inclusionthrough (mostly symbolic) consultative bodies. Realgrowth over the period is slightly lower, at just under 5 percent, but some economies in the region far exceedthis. Despite diversification efforts, government revenuesremain dependent on resources and drop significantlyaround 2011 as oil prices hit a low, but recover in thefollowing years (see Figure 3).

2021–25Governance structures in 2025 are, in most cases,profoundly different from those in 2007, following 17years of streamlining the still-dominant public sector.Ageneration of talented, nationally educated technocratsensures that, for the most part, GCC national institutionsare efficient and effective. Ruling families primarily actas occasional advisers rather than executive leaders, andthere is a strong meritocratic culture throughout thepublic and private sectors.This is created through effectiveleadership by example and through instilling the meritprinciples in the educational system. Unemployment,although still important, remains contained below 13percent overall despite a population that has almost dou-bled in 25 years. Governments are focused on refiningtheir industry policies—these occasionally fail, but theyhave been fairly successful in a global environment char-acterized by solid GDP growth of 3.5 percent.Theseindustry policies have a distorting side-effect of skewingentrepreneurship toward government-favored sectors,and productivity remains below levels of internationalpeers.At the same time, the private-sector benefits fromwell-enforced corporate governance standards and fromworld-class financial institutions operating in the region.Oil continues to be the primary source of budget revenuefor the GCC countries because oil prices are robust, and

133

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

–60

–40

–20

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 3: Gulf Cooperation Council budget balance: Oasis scenario

Source: PFC Energy.

Perc

ent o

f GD

P

part3.fin 3/22/07 12:14 PM Page 133

budgetary spending is largely contained. Despite asomewhat difficult environment, integration with theglobal economy continues and there is a strong increasein trade in goods and services. Both trade in goods andtrade in services more than quadruple.The politics ofthe region are not profoundly different from the begin-ning of the century, but wealth has increased significantly,with GDP per capita hitting levels above US$30,000 innominal terms. Despite ongoing calls for increasedtransparency in decision-making, people are generallysatisfied with their governments’ management of naturalresources and social issues.

SandstormSandstorm describes a future where regional instability isa defining factor, affecting the ability of GCC countriesto effectively carry out much-needed institutionalreforms. In a depressed global environment affected byextremely volatile oil prices, reforms deflate or collapsefrom a lack of attention to the root cause of internalissues and the tendency for governments to focus onshort-term stability at the expense of long-term solutions.Caught in a shifting, violent environment, the GCCcountries are blinded, unable to navigate their way out ofthe sandstorm and identify opportunities for prosperityfor their populations, despite the fact that low oil pricesfrom 2011, caused by the global slowdown, offer awealth of incentives for reform. In terms of competitive-ness, the GCC countries find themselves worse off thanthey were at the beginning of the century, with stagnant and inflexible institutions, eroded and irrelevant publicinfrastructure, a poorly developed and internationallystruggling private sector, and a lack of educational andfinancial capital with which to rectify the situation.

2007–12The Gulf region is thrown into chaos in 2009 when theUnited States undertakes a military strike against Iraniannuclear sites, provoking Iranian missile attacks on USbases in GCC countries along the Gulf and helping toprecipitate a global recession. Oil prices stabilize, after aninitial drop, when they reach levels as low as US$30 perbarrel in 2011 down from US$140 in 2009. In addition,populations in GCC countries react strongly to thedeteriorating security situation, resulting in a period ofinternal instability. GCC governments scramble to headoff internal and external threats to their authority. Fundsare diverted to military spending at the expense ofimproving institutions and education. Instead of fosteringR&D and creating a long-lasting capital base, investmentsare directed toward public infrastructure of limited utili-ty, creating only temporary employment.As a result ofthe political instability, military attacks, and the like, andthe failure to support private-sector reforms (negatingthe influence of fluctuating oil prices), the real economycontracts by 19 percent over the period.

Unemployment, in particular among the young,remains at high levels in most countries.

2013–20In a depressed global environment, a lack of attention tothe causes of internal problems mean that reforms areineffective. Governments have a tendency to focus onshort-term fixes rather than long-term solutions, andthey divert the oil revenues that do exist to extensivearms purchases and investment in nonproductive assets.Capital is leaked to Europe.A series of terrorist attackscauses Gulf populations to carefully consider their inter-nal security, and financial markets across the region suf-fer heavily as a result. Nevertheless, real non-oil GDPrecovers slightly to regain the levels prior to the conflictwith Iran, and success for Kuwait and United ArabEmirates brings the GCC current account balance backinto the black.

Labor markets continue to be strongly regulated in favor of national employees, who appear not onlyoften to lack the necessary skills but also to have a lessperformance-oriented attitude than foreign workers.This in particular affects executive positions in compa-nies. Reforms of government bureaucracies, althoughundertaken, are only superficially implemented, consti-tuting a major impediment to business. Huge delays andcosts for obtaining permits are the rule and governmentcontracts are awarded arbitrarily.The bureaucratic prob-lems intensify after reforms are scaled down in 2015 and2016. By 2020, businesses consider the inadequatelyeducated labor force and the inefficient governmentbureaucracy to be the two most problematic factors fordoing business.

During this time, GCC countries start falling furtherbehind the rest of the world in terms of the adoptionand implementation of new technologies, and they havemore and more difficulty competing with internationalplayers from China and India. Even in the explorationand production of oil, the value added is not capturedsuccessfully.And although a few pockets of excellenceemerge in selected sectors and countries, reforms arenot implemented effectively and a more prosperous andproductive private sector does not emerge.

2021–25The GCC countries are caught in a trap of needing tocontrol their populations out of fear of further unrest,but being thereby unable effectively to create the condi-tions for renewed growth, despite rising oil revenues.GDP growth in the GCC is stable at annual rates ofabout 5 percent. Reform efforts remain constrained bythe fears of a deteriorating security situation.Access toeducation remains difficult, and distance learning is theonly viable option.At the same time, ICT infrastructureis considered subversive by governments. Meanwhile,thanks to resilient populations making the most of the

134

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

part3.fin 3/22/07 12:14 PM Page 134

globalization of communications, a new sense of identityemerges although the broader humanitarian cost of theeconomic slowdown (the result of the inability to createthe conditions for renewed growth) is considerable—and at least partly avoidable. Succeeding generationshope to make a better start in 2025, but they have farless to work with than they might have had.

The Fertile Gulf

describes the rise of the GCC countries as innovationhubs in a global environment characterized by strongdemand for energy and increasing globalization.Regional stability gives the GCC countries the oppor-tunity to focus on enhancing their human capital at alllevels, investing heavily in education while proceedingcarefully with political and institutional reforms to sup-port their growing economies and societies. High oilprices resulting from sustained demand and globalgrowth provide GCC countries with ample resources. Inthis way, along the Persian Gulf modern, highly compet-itive economies make the most of the conditions ofglobalization, thanks to efficient institutions and marketsand a broad base of local, highly skilled workers.

2007–12Growing tensions and insecurity spur a series of multi-lateral conferences involving the leadership of GCCcountries.The problem of regional violence is addressedat political and cultural levels, resulting in increasedregional stability.At the same time, recognizing theimportance of education and innovation, a number ofGCC governments decide to spend their built-upwealth on educating their people and jump-startingR&D in a radical and dramatic fashion.As a result, anumber of huge education and R&D funds emerge,sponsored by private individuals and supported by GCCgovernments and commercial partners. Encouragingentrepreneurship by creating more business-friendly reg-ulatory and institutional environments through improv-ing corporate law and by significantly reducing thenumber of procedures required to set up a business werekey elements to the success of these reforms. Just asimportant was the establishment of funds that bothincentivize and aid the development of new businessideas, so that the GCC countries effectively begin toemulate the “Silicon Valley” model.The involvement ofthe private sector in these economic reforms is animportant aspect of their success, and is at least partlyresponsible for compounded real annual growth of over6 percent for the region as a whole.

2013–20Less volatile (but still bullish) oil markets do not distract GCC countries from private, non-energy sectordevelopment, the success of which reduces national

unemployment while creating an array of sought-after,highly skilled jobs for those coming out of the newlyreformed educational system.A series of internationalbilateral agreements to financially support research projects in exchange for intellectual property rightsresults in an innovation explosion in the GCC countries,and new R&D firms flood into the region. Incrementalimprovements in institutions (including strong reforms toproperty rights in terms of legislation and enforcement)to manage the burgeoning entrepreneurship combinedwith a more influential business community further sup-port regional development. Public investment in infra-structure is more efficient, and transparency andaccountability of public institutions are significantlystrengthened, reducing corruption and nepotism.A one-license approach is introduced in the GCC. Regionalinfrastructure is developed and it is easier for people tomove between countries, thereby rendering the laborallocation more efficient. In some countries, professionalethics are strengthened and the business sector benefitsfrom an increasing participation of women in the labormarket. Financial markets in the region are significantlystrengthened in terms of sophistication of both productsand regulation. Economic expansion continues stronglyon the back of monetary integration averaging over 5percent real growth for the period, with extremelystrong growth in Kuwait and the United Arab Emirates.

2021–25Political reforms, which have proceeded at differentstages across the GCC countries, find balance;Westerndemocratic ideals are not directly transplanted. Instead,governments generate their own models of participatorygovernance over a period of experimentation andincreasing engagement with their populations.After a sea change in both attitudes to and the provision oftertiary education,Arab graduates are keenly soughtafter for positions in finance, engineering, and medicalsciences in Asia, Europe, and North America. GCC-based business schools make it to the top 50 in worldrankings.Thanks to the improved education and goodbusiness climate, unemployment is greatly reduced whilethe proportion of migrant workers decreases. Credit iswidely available to a new generation of entrepreneurs,who drive much of the continuing strong growth in theregion. Economic diversification results in a greatlyreduced share of oil in GDP, and the GCC countriesemerge as an innovation hub, where the constraint ofdemographics is turned into a world-class asset, enhanc-ing the region’s competitiveness.This looks set to con-tinue with extremely healthy, and growing, positivebudget and current balances.

Figures 4–7 show the diverging evolution of themain economic indicators in the three scenarios;Table 1summarizes the impact on the nine categories used toassess competitiveness.

135

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

part3.fin 3/22/07 12:14 PM Page 135

136

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

0

30

60

90

120

150

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Figure 4: Oil prices

Source: PFC Energy.

US$

(nom

inal

) per

bar

rel)

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Figure 5: Real GDP per capita

Source: PFC Energy.

US$

(200

0 do

llars

)

Oasis

Sandstorm

Fertile Gulf

Oasis

Sandstorm

Fertile Gulf

part3.fin 3/22/07 12:14 PM Page 136

137

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

60

65

70

75

80

85

90

95

100

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Figure 6: Share of non-oil sector in real GDP

Source: PFC Energy.

Perc

ent

–200

–100

0

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Figure 7: Gulf Cooperation Council budget balance

Source: PFC Energy.

Curr

ent U

S$ (b

illio

ns)

Oasis

Sandstorm

Fertile Gulf

Oasis

Sandstorm

Fertile Gulf

part3.fin 3/22/07 12:14 PM Page 137

138

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5

OASIS SANDSTORM THE FERTILE GULF

2nd pillar: Infrastructure • Despite attempts to coordi-nate investment at aregional level, infrastruc-ture development is hap-hazard among the GCCcountries.

• Top-down implementationof clear economic strate-gies means infrastructureimproves over time, butlack of transparency and arigid approach to planninglead to occasional misallo-cation of resources.

• Scarce resources are notfocused toward infrastruc-ture development and leadto poor overall quality.

• Tendency to spend vastamounts on public infra-structure projects of limit-ed utility, creating tempo-rary employment ratherthan a long-lasting capitalbase.

• Infrastructure developmentis coordinated and heavilyinvested both within andamong the GCC countries,primarily in partnershipwith the public sector,resulting in an efficient allocation of budget surpluses toward criticalinfrastructure to supportsustainable economicdiversification.


1st pillar: Institutions • Public-sector reform leadsto technocrats ruling.National institutions aremore effective and lesswasteful, but weak areasremain. A focus on top-down reform and imple-mentation means the pub-lic sector is still the corner-stone of economic devel-opment.

• Property rights arestrengthened along withthe rule of law, but there isstill a lack of transparencyat high government levelsin a number of countries,and the elite still controlmany of the resources.

• Reform of corporate lawmeans that private institu-tions are stronger andmore effective; govern-ment remains fairly hands-off vis-à-vis corporations ina bid to encourage private-sector development.

• Corruption and lack oftransparency worsen asdefense spending risesacross the region and polit-ical reforms are pulledback.

• Property rights remain rela-tively undeveloped acrossthe region as governmentsseek maximum controlover their populations.

• Business reforms neededto survive the global eco-nomic downturn were notsufficiently implementedby the governments.

• Unaddressed tensions inthe region, occasionallyspilling over into domesticunrest, lead to reducedsecurity and higher busi-ness costs of terrorism.

• The GCC remains vulnera-ble to terrorism and oil-price volatility.

• Governments streamlineregulation to reduce redtape, introducing “one-stopshops” and improvingcoordination between andwithin ministries.

• Despite a rather slow start,GCC countries proactivelyembark on fundamentaland genuine political, legal, and administrativereforms for increasedtransparency and accountability, acceleratedby a push from corpora-tions. This results in lowercorruption and improvedjudicial independence.

• Improved regional securitylowers the business costof unrest.

Table 1: Qualitative comparison of the trends between 2006 and 2025 based on the Global Competitiveness Index

part3.fin 3/22/07 12:14 PM Page 138

139

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5


3rd pillar: Macroeconomy • Despite relatively high oilprices, fast-growing popu-lations and governmentspending results in budgetdeficits by 2011 in manyGCC countries. Strong eco-nomic growth internallyand robust oil prices returnmost governments to sur-plus by 2015, enabling sus-tained public investment.

• GCC monetary integrationoccurs in 2012, positivelyinfluencing regional tradebut causing problems forsome countries in terms ofachieving inflation and fis-cal targets, given the eco-nomic differences betweenthe GCC countries.

• Oil-price volatility and a fail-ure to diversify away fromhydrocarbons means gov-ernments struggle to keeptheir budgets balanced.Government debt growssubstantially across theregion.

• GCC countries experienceproblems keeping their cur-rencies on their peg due tofluctuations in the value ofthe US dollar, and mone-tary integration (scheduledfor 2010 and then delayed)is eventually called off.

• Consistently high oil pricesand strong global demandin the non-oil sector drivesconsistent regional budgetsurpluses. This results indecreasing governmentdebt levels and healthysavings rates.

• High inflation rates fromstrong consumer demandand government spendingon infrastructure invest-ment causes concerns, butsubsides follow market-driven increases in thedomestic supply of bothgoods and labor.


4th pillar: Health and primary education

• Gradual improvement inboth health care and pri-mary education are theresult of large publicinvestment in both areas.

• Deterioration of the health-care systems in some GCCcountries result in reducedlife expectancy and higherinfant mortality. A failure toaddress shortcomings inprimary curricula and anoverall deterioration of theeducational system meansan ongoing lack of eco-nomically relevant skills inthe population.

• Modern health infrastruc-ture, skilled staff, and lowinfant mortality are rein-forced by civil society andprivate-sector involvement.

• School curricula are mod-ernized and revised on anongoing basis, ensuring the relevance of furthereducation.

Table 1: Qualitative comparison of the trends between 2006 and 2025 based on the Global Competitiveness Index (cont’d.)


5th pillar: Higher education and training

• Education standards areestablished across theregion as part of a bid tocoordinate skills and train-ing programs.

• Governments fund on-the-job training for nationalswith both local and interna-tional firms and launch aregionwide job searchwebsite.

• Lack of funding, restric-tions on curricula, and alack of incentives forachievement mean higher-education standards acrossthe region deteriorate.

• Alliances with foreign insti-tutions cease to exist andsome leave the region alto-gether.

• The very wealthy sendtheir children abroad, buttravel restrictions meanthat for the middle classdistance learning is theonly viable option.

• Government funding ismatched by private-sectorinvolvement, with interna-tional schools, vocationaltraining, and scholarshipschemes expanding region-ally. GCC-based businessschools enter the top 50 inworld ranking.

• Exchange programs withsecondary schools and uni-versities are encouraged todevelop cross-cultural andacademic learning.

part3.fin 3/22/07 12:14 PM Page 139

140

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5


6th pillar: Market efficiency

• Marked improvement isseen in markets for goods,labor, and financial products.Reforms are top-down andoccasionally subject tooverregulation.

• Distortions occur becauseof government-directedindustry policy and theexistence of sectoral subsi-dies, leading to capital bias.

• Labor markets for GCC citizens are generally openand for the most part areregionally coordinated, withmovement of labor greatlyimproved.

• Financial markets occasion-ally suffer from interferenceby government interests.

• Market efficiency suffersas governments remainheavily involved with mostsectors, using regulation asa barrier to what they seeas a security threat fromforeign interests.

• Restrictions on the move-ment of people cause inefficiencies in the labormarket.

• Financial markets are inturmoil because of ongoingregional and increasingdomestic instability.

• Favorable market conditions(e.g., increasing foreignownership) lead to a higherdegree of competition andefficiency as governmentsliberalize their capitalaccounts.

• The introduction of standardized business regulations across the GCC enables the quickexpansion of firms to otherGCC countries.

• Financial markets arestrong and self-regulatingas the GCC capital marketsbecome a new source ofpower in the region.



7th pillar: Technological readiness

• Most GCC governmentssponsor large-scale invest-ments in ICT as part oftheir drive to improveskills.

• GCC countries continue tolag behind on adopting andimplementing new tech-nologies, while governmentsfail to stimulate the localbusiness elite to invest andimprove core ICT assets.

• Privatization of ICTimproves quality andaccess to the Internet, andgovernments auction therights to provide wirelessaccess across the GCC.


8th pillar: Business sophistication

• Governments support andmonitor a significant pro-portion of firms withinbusiness clusters, directingindustry policy towardenhancing strategic sectorssuch as oil and gas value-added activities.

• Firm strategies in chosenindustries are greatlyenhanced, and productivityrises. However, some sectors lag considerably.

• Business sophistication ishampered by a lack ofskills and the decliningcompetitiveness of localfirms.

• The formation of newindustry clubs and prolifera-tion of venture capital networks to support entrepreneurship increaseinter- and intra-industryknowledge transfer.

part3.fin 3/22/07 12:14 PM Page 140

141

3.1:

The

GCC

Cou

ntrie

s an

d th

e W

orld

: Sce

nario

s to

202

5


9th pillar: Innovation • Innovation mainly focuseson the oil and gas sector.R&D increases significant-ly, but the bulk of this isdirected toward govern-ment-sponsored projects.Some protectionismremains in certain areas,with governments citingsecurity concerns.

• Limited innovation is pres-ent within the GCC. Mosttechnology is imported,and the little that emergeslocally is stifled.

• The GCC countries workhard to catch up oil andgas technologies, but alsoderegulate in R&D whileoffering large incentives forinvestment in the develop-ment of new technologiesacross all sectors

• Strong research cooperationwith foreign universitiesboosts the quality of R&D and technology commercialization.


Conclusion: The way forwardThe GCC countries are currently at a crossroad interms of their economic competitiveness.Althoughreforms to date have been, on the whole, well thoughtout and positively implemented, high oil prices and theresulting boom in revenue may distract governmentsfrom the need for further, more painful, reforms.Depending on their decisions now, the GCC countriescould remain primarily oil exporters, or they coulddevelop the Arabian Peninsula into an innovation hubthat leads the global economy.

The competitiveness of GCC countries will dependon how well elements contained in the nine pillars areintegrated, embedded, and constantly improved. Giventhe heterogeneity of countries, it is important to bear inmind that key themes such as leadership, strong and effi-cient institutions, diversification of the economy, effec-tive primary and job-aligned higher education, theadeptness on technological prerequisites, and the foun-dation for innovation will play out differently in eachcounty within each scenarios.

The stories that the scenarios present, supported bythe underlying quantitative research and modeling, clearlyindicate that the future of competitiveness for the GCCcountries relies heavily on investment in education andinnovation, supported by an enabling business environ-ment and well-functioning institutions.While the viewfrom 2007 is that institutional and economic reforms arewell underway and look set to continue across the GCCcountries, this is by no means certain. In addition, currentcompetitiveness bottlenecks related to workplace skills,access to credit, and innovation must be resolved witheffective investment and better incentives for increasedproductivity as well as improved labor force participa-tion.The scenarios indicate that serious efforts in theseareas must be accompanied by a strong leadership that iswilling to forge ahead with sometimes unpopular

reforms, using the region’s natural resource advantagesto absorb costs of adjustment in the short term in returnfor improved competitiveness and sustainable economicprosperity in the long term.

Having illustrated three plausible futures for thecompetitiveness of the GCC countries in these scenarios,the next step is to look to indicators that can signalwhich path the GCC countries are proceeding down.These scenarios suggest that keeping the pulse of thestate’s local education, R&D spending, and entrepreneur-ship could provide a useful indicator for the long-termhealth of regional economies.The Global CompetitivenessIndex, which comes to similar conclusions, providespolicymakers in the region with a framework of indica-tors that not only point to competitive strengths andweaknesses as well as areas for potential investment, butcan also be used to track progress over time.This Indexalso provides relevant benchmarks and can inform policydecisions by pointing to international best practice.Another way in which the scenarios can aid economiccompetitiveness is by opening policymakers up to newopportunities to improve GCC institutions, and toensure that they are well informed of alternative optionsand prepared for those times when expectations are notmet. GCC countries seem to be on the high road ofcontinued prosperity and improved competitiveness.However it is important that current investments bemade wisely to ensure that this continues for the next20 years and beyond.

Notes1 The Gulf Cooperation Council (GCC) countries are Bahrain, Kuwait,

Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

2 Singapore has been selected as a benchmark because it operates atthe same stage of development as most of the GCC countries.

part3.fin 3/22/07 12:14 PM Page 141

arab world competitiveness report 2007. part 10/11

Documents