How Gulf Cooperation Council (GCC) Nations Can Stimulate Private-Sector Innovation and Sustain Long-Term Growth

Building a Diversified Economy:

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الملخص التنفيذيشهد نصف القرن الماضي تحديًثا وتطوًرا غير مسبوقين بين دول مجلس التعاون الخليجي الغنية بالنفط، والتي تحتل اليوم

مرتبة مرموقة بين قادة العالم في نصيب الفرد من الدخل. ومع ذلك، يعترف قادة مجلس التعاون الخليجي أن الموارد النفطية بمفردها ال يمكنها أن تعزز االزدهار االقتصادي على المدى الطويل، ولذا فإنهم يسعون إلى خلق قطاع خاص متنوع ينمي

الدخل من مجموعة متنوعة من الصناعات المزدهرة. لزيادة فهمنا لكيف يمكن لدول مجلس التعاون الخليجي تحقيق هذا الهدف الطموح، طلبت بوز ألن هاملتون من وحدة االستخبارات االقتصادية دراسة التحديات والعقبات الرئيسية، إلى جانب فرص النجاح، في عمان وقطر والمملكة العربية السعودية واإلمارات العربية المتحدة.1 من بين النتائج الرئيسية، حددت الدراسة

الفرص الواعدة لنمو القطاع الخاص واالبتكار في العديد من الصناعات، بما في ذلك القطاع المالي وقطاع االتصاالت. لكن الدراسة وجدت أيًضا أن زيادة الميزانيات الحكومية بشكل ثابت يهدد بتزاحم االستثمارات المطلوبة لدعم قطاعات األعمال

الوليدة. كما يمثل خلق قوى عاملة وطنية المطلوبة في اقتصاد متنوع تحديات، مثل تطوير التعليم وبرامج التدريب لخلق مصدر ثابت للعمالة المهرة وقادة األعمال.

تلك التحديات صعبة لكنها ليست مستعصية على الحل. تمتلك بوز ألن هاملتون خبرة كبيرة في تقديم النصح للقادة الحكوميين حول السياسة واالستراتيجية، ومن ثم تساعدهم على تصميم وتنفيذ حلول عملية تواجه احتياجاتهم الخاصة. بناء على التحديات التي

تواجه دول مجلس التعاون الخليجي، نوصي بخمسة إجراءات رئيسية لمساعدة قادة مجلس التعاون الخليجي على تطوير وتنفيذ الحلول التي تناسب الحاالت الثقافية واالقتصادية الفريدة لكل دولة:

لحسن الحظ، فإن دول مجلس التعاون الخليجي تمتلك موارد قيمة تستند إليها. تشمل تلك الموارد ليس فقط عائدات النفط التي تساعد في تمويل استثمار القطاع الخاص، ولكن أيًضا مواطنيها، الذين يمتلكون رغبة وكبرياء وطني راسخ لرؤية نجاح بالدهم. سوف يطلب منهم مشاركتهم الجماعية، خاصة من خالل شراكة تعاونية فعلية في القطاعين العام والخاص، من أجل بناء اقتصاد

متنوع وقوي ومبتكر.

1 هذه أربع دول من بين دول مجلس التعاون الخليجي الست. الدولتان األخريان هما البحرين والكويت.

وضع حوافز وإصالحات هيكلية لتعزيز المنافسة االقتصادية واالبتكار.

وضع حوافز لجذب وتدريب القوى العاملة الوطنية لريادة األعمال ووظائف القطاع الخاص.

اختبار وقياس وتقييم تأثير المبادرات السياسة قبل وأثناء التنفيذ.

تنظيم حملة اتصاالت وطنية لحشد مشاركة واسعة النطاق ولدعم البرامج االقتصادية.

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إقامة شراكة بالمنفعة المتبادلة بين القطاعين العام والخاص لوضع وتنفيذ المبادرات لتحقيق األهداف االقتصادية الوطنية.

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Executive SummaryThe past half century has seen unprecedented modernization and growth among the oil-rich Gulf Cooperation Council (GCC) nations, which today rank among the world leaders in per capita income. However, GCC leaders recognize that oil resources alone cannot sustain economic prosperity over the long term, and so are seeking to create a diversified private sector that generates income from a variety of thriving industries. To further our understanding of how GCC nations can achieve this ambitious goal, Booz Allen Hamilton commissioned the Economist Intelligence Unit (EIU) to study the major challenges and roadblocks, as well as opportunities for success, in Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).1 Among its major findings, the study identified promising opportunities for private-sector growth and innovation in several industries, including the financial and communications sectors. But the study also found that steadily increasing government budgets threaten to crowd out investments needed to support nascent business sectors. Creating a national workforce for a diversified economy also presents challenges, such as developing the education and training programs to create a steady pipeline of skilled workers and business leaders.

These are difficult but not insurmountable challenges. Booz Allen Hamilton has significant experience advising government leaders on policy and strategy, and then helping them design and implement workable solutions addressing their specific needs. Based on the challenges facing GCC nations, we recommend five major actions to help GCC leaders develop and implement solutions that fit the unique cultures and economies of each nation:

Fortunately, GCC nations have valuable resources to draw upon. These include not just oil revenues to help fund private-sector investment, but also their citizens, who possess a fierce national pride and desire to see their nations succeed. Their collective participation, especially through a truly collaborative partnership of the public and private sectors, will be required to create a diversified, robust, and innovative economy.

1 These are four of the six GCC nations. The other two are Bahrain and Kuwait.

Establish incentives and structural reforms to strengthen economic competition and innovation.

Establish incentives to attract and train the national workforce for entrepreneurship and private-sector employment.

Test, measure, and evaluate the impact of policy initiatives before and during implementation.

Mount a national communications campaign to garner widespread participation and support for economic programs.

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Forge a mutually beneficial partnership between the public and private sectors to create and implement initiatives for achieving national economic goals.

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The EIU Study: Economic Challenges and OpportunitiesA number of factors are creating an urgent need for GCC nations to move away from oil-centric to diversified economies that can support a broad array of industries and provide income-generating opportunities for businesses and workers, according to the EIU study. World oil prices have begun to level off, thus depressing national budgets. At the same time, the cost of national citizens entering the public sector will absorb larger portions of those budgets. In fact, Oman has already begun running a budget deficit and Saudi Arabia is expected to do so within two years due to the growth in government salaries and subsidies. The rising deficits could undermine economic diversification efforts by crowding out investments in infrastructure and developing industries.

Shifting nationals away from the public sector to private-sector employment will be difficult. In three of the four nations surveyed, more than of half of employed nationals are currently employed in the public sector, as compared to 20 percent in the United Kingdom. Nationals prefer working for the government, where the hours are shorter and the wages higher than in the private sector. In the UAE, nationals who work in the public sector can earn almost twice as much as their private-sector counterparts. The dual challenge of reducing government budgets and creating a diversified economy will require measures to make private-sector employment attractive to nationals.

Several industries offer promising opportunities to grow and anchor a diversified economy, according to the EIU study. For example, the communications sector is expected to grow steadily in all four countries, which also want to position themselves as information technology or cybersecurity hubs. Other sectors that have potential for growth are financial services, tourism, and healthcare. But jump-starting these industries and helping them take root will require that investment capital and workers be diverted from the public sector.

Ensuring a skilled workforce to fill the jobs of a diversified economy also presents a challenge. Workforce participation among nationals is extremely low. For example, just 18.3 percent of Saudi Arabia’s working age population is employed, compared to 63.5 percent in the United States. The low workforce rate contributes to the overall burden on government and represents a vastly underused resource for the private sector. Consequently, these nations will need to educate and train citizens for the new jobs anticipated in the diversified economy, as well as develop the skills and business mindset to fuel entrepreneurship and innovation in a competitive marketplace.

Five Keys to Building a Robust, Diversified EconomyUnlike nations that are struggling to build modern, diversified economies, the GCC nations have a strong foundation with many important elements already in place. Airports, harbors, and other transportation infrastructure support trade and commerce. Prosperous cities offer modern office buildings and workplace facilities. Political stability encourages both foreign trade and domestic business ventures. Oil revenues provide income to fund investments in new business ventures, education and training, and other needs. The

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national populations are generally well educated, and what may be lacking in private-sector skills is balanced by national pride and a strong desire for success. GCC nations can build on these strengths to create diversified economies that can compete effectively in the global market place and sustain national growth.

Booz Allen Hamilton has worked closely with government leaders not only to devise strategies, but also to help carry out those strategies to successful completion. The most successful strategies are developed and implemented through the collaborative partnership of the major stakeholders in which the entire megacommunity of interested parties is involved from start to finish (see sidebar below). This is important not just because it garners the buy-in and support of participants, but also because it stimulates and uncovers the best ideas, and it enables the most skilled talent to be recognized and rise to the top. In addition, the solutions will touch multiple areas, including government policy, people and culture, technology, and business operations. Changes and improvements in one area will reinforce changes in another to help carry forward the national strategy.

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Creating an Effective Megacommunity for Economic Growth

Many modern problems facing cities, nations, and global regions are too large and complex for any single organization—whether from government, business, or civil society—to solve on its own. For example, when a nation responds to a disaster, it marshals assets and resources from a multitude of organizations, including government disaster agencies, police and emergency responders, relief organizations such as the Red Cross, state and local officials, local businesses, and community volunteers. All have an interest in an effective rebuilding effort. Collaboration is essential, because all depend on the others for success. We call this collection of interdependent stakeholders a “megacommunity.”

A megacommunity of organizations can form to address any issue of compelling, mutual importance, such as climate change, economic development, conservation, or energy policy. Some members of a megacommunity will be larger and more powerful than others, but each plays a role and contributes to problem-solving efforts. Megacommunities are created because no single organization owns all of the resources, nor does it have sufficient power or authority, to solve the problem by itself. As a problem-solving approach, the megacommunity concept represents a powerful tool for helping public- and private-sector organizations collaborate in addressing complex regional, national and global challenges.

The megacommunity concept has direct relevance for GCC nations seeking to build sustainable economies with resilient businesses and a strong national workforce. Their efforts will involve stakeholders from government ministries, industry, the workforce, educational and training institutions, and other organizations. A top-down approach in which one organization dictates solutions to the others does not typically work in these situations, because success depends on the participation and buy-in from all organizations. Although each organization may have its own particular set of missions and interests, they also have a shared interest in their nation’s economic goals. They are interdependent, and so an effective megacommunity will foster genuine collaboration in pursuit of its common goals.

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How can each GCC nation create a strategy and identify the solutions that are right for its unique circumstances? Based on the GCC nations’ challenges and goals, we recommend five important actions:

Forge a mutually beneficial partnership between the public and private sectors to create and implement initiatives for achieving national economic goals.

Each of the four GCC nations in the EIU study has created a long-term strategy or plan for economic development: Oman Vision 2020, Qatar Vision 2020, Saudi Arabia Vision 2020, and UAE Vision 2021. These plans guide the development of policies and regulations to spur business growth and encourage expanded hiring of nationals in the private sector. For example, government officials have taken such actions as assigning quotas limiting the number of expatriates that may work in specified industries, raising private-sector wages for nationals, and offering subsidies to targeted industries. These measures would have a greater chance of achieving desirable outcomes if they were developed in collaboration with the private sector. Government officials can benefit from the insight of business leaders regarding how to attract nationals and stimulate private-sector growth, as well as how best to implement the chosen solutions. Similarly, business officials need to understand the reasoning behind their government’s strategy and goals. Involving the private sector early in the process of incubating ideas and creating initiatives will provide government officials with invaluable assistance to formulate policies for achieving national economic objectives.

Governments have been most successful when they create sector-specific partnerships in the sectors that are targeted for development and growth. This enables the government-industry partnerships to address challenges and issues that are unique to each sector. Broad industry representation is desirable, so that the partnerships are not captured by one or two companies pushing their own interests. Among the questions each government-industry group might address are:

• What are the workforce skills needed to promote growth in our sector?

• How might we partner with education and training institutions to help workers obtain those skills?

• Are there opportunities for government and industry to collaborate in funding basic research, workforce training, and other sector needs?

• How can government help foster an economic environment that creates competition and encourages entrepreneurship?

• What are the inherent roles of government and the private sector, not only when emerging industries are seeking an economic foothold, but also after industries mature and companies can openly compete?

The answers to these questions will differ for each sector. But it is important to note that industry participation from the beginning is essential, because the public and private sectors should be collaborators in creating and carrying out national economic initiatives. Their ability to work together and avoid an “us-vs.-them” mentality will help spur the best ideas and plans for addressing the other four points of action. Consequently, the public sector should engage the private sector in a manner that encourages the transparent and free flow of information between the two parties, thus building the trust and cooperation needed to permanently sustain growth.

One example of such an effort is the recent announcement by the Abu Dhabi Municipality that it was soliciting private-sector participation in its plan to transform the western end of the Corniche with new restaurants, shops, and a high-end beach club. The government intends to offer bidders a chance to participate in the development through a build-operate-transfer arrangement.

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Establish incentives and structural reforms to encourage further economic diversification through competition and innovation.

Governments are often tempted to create “make-order” jobs for nationals. This may provide short-term results and the appearance of economic progress, but such jobs cannot be sustained without continued government subsidies. Instead, governments should focus on creating a business environment that facilitates private-sector growth over the long term. But how is this to be accomplished? Each nation, of course, should pursue policies suited to its own political, economic, and cultural institutions, but an effective strategy will include these elements:

• Arigorousanalysistoidentifyandprioritizepromisingindustriesforinnovationandgrowth. A good starting place is the EIU study, which identified communications, information technology, healthcare, the financial industry, and tourism, among the most promising sectors.

• Investmentinentrepreneurship,basicresearch,andinnovation.GCC governments have already been making such investments, such as providing seed capital to help entrepreneurs start businesses or, on a larger scale, through infrastructure investments to create innovation hubs.

• InvestmentinInfrastructure.Many GCC nations have also begun building major innovation centers to attract talented entrepreneurs, innovative companies, private equity, and venture capitalists.

• Aplantostartlocally,expandglobally.GCC governments can focus initial efforts on enabling a competitive business environment that yields national champion companies in the local market, and with this foundation, these businesses can begin to compete more profitably in regional and global markets.

• Apolitical,legal,andsocialclimatethatsupportseconomiccompetitionandprovidescommensuraterewardstobusinessforsuccessfulinnovationandtoworkersfortheirskills.GCC nations still have work to do in this area, such as making private sector work more attractive to nationals and creating more open workforce markets.

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Governments can pursue a variety of strategies to achieve these goals. For example, government ministries could increase research and development in targeted areas through tax policies, matching funds, grants, and other incentives to companies, universities, and research institutions. Crowdsourcing techniques have also proven successful in generating innovative ideas and cutting-edge solutions to address specific types of challenges. In developing policies to strengthen the competitive environment for selected industries, GCC nations could look to replicate the policies and conditions in industries where healthy competition may already exist, such as the banking and finance, airlines, and tourism industries. Such efforts would help companies build and sustain the organizational infrastructure, management capabilities, workforce skills, and business culture necessary for innovation and growth in the competitive marketplace.

As GCC nations look to build industries with world-class technical capabilities, they might start by supporting companies and solutions that can address their own major challenges. For example, a cyber attack on any of the GCC nations’ critical infrastructure components, such as energy, transportation, water, or communications, could inflict significant damage on these nations. Consequently, a major initiative to improve the cybersecurity of critical infrastructure would spur innovation and the development of expertise and skills that would translate into value across a wide spectrum of industries, while also filling an important national security need for these nations. Moreover, by creating national awards and directing resources to solve this or other major challenges, GCC nations could showcase technical and industrial capabilities while also helping to build an economic base for sustained employment and growth.

Encouraging Innovation to Tackle Major Challenges

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For a long-term and sustainable economy, establish incentives to attract and train the national workforce for entrepreneurship and private-sector employment.

Efforts to provide private-sector employment for nationals should be developed in concert with initiatives to promote private-sector growth. Several factors are key to attracting nationals to the private sector. First and foremost, nationals will gravitate toward jobs in which the working conditions—wages, hours, vacations and holidays, benefits, etc.—are commensurate with the public sector. In addition, nationals will need the knowledge and skills required for private-sector jobs that can generate the desired pay and benefits. These two conditions go hand in hand. Consequently, as the government moves to stimulate targeted sectors, it should also support education and training initiatives to provide nationals with the needed skills and knowledge for these sectors. Such initiatives are most effective when planned and implemented with input from the private sector to ensure that education and training align with industry’s workforce needs.

An important corollary of these conditions is this: Programs that seek to build private-sector employment of nationals solely through wage subsidies or mandated employment may provide a short-term fix but ultimately could stifle innovation and growth. Companies will need talented workers in order to compete regionally and then internationally, but they will have difficulty competing if mandated wages exceed market-determined wages. Moreover, if employment and wages are essentially guaranteed regardless of employees’ skill levels, this undermines the personal responsibility, pride of accomplishment, and motivation to excel that characterizes a dynamic and robust workforce. Fees levied against businesses for hiring expatriates also hurts their ability to compete. In short, the government cannot create by fiat the necessary working conditions to attract nationals. Long-term success depends on the ability of GCC governments to: 1) stimulate thriving businesses that can reward skilled employees with high wages and an attractive work environment; and 2) develop a national workforce with the skills needed to compete in the global marketplace.

One way to help attract and train nationals is to provide targeted businesses with short-term subsidies to hire nationals. The subsidies help to offset the costs of training as nationals develop skills and knowledge. Our experience helping GCC nations implement this approach shows that nationals recognize the value of on-the-job training and work extremely hard. The challenge is for government and businesses to craft programs that compensate companies fairly for providing the training, while ensuring that workers develop new skills that will eventually command higher market salaries. The national economy will benefit from this program because the skilled workforces will make these nations more attractive to both foreign and domestic businesses and investors.

Even as private-sector wages and working conditions improve, some GCC nationals may still prefer public-sector employment. As already noted, nationals often prefer working for the government, and many have negative opinions regarding private-sector employment. Consequently, our recommended action No. 5 to (Mount a national communications campaign to garner widespread participation and support for economic programs), will be essential to help create more positive attitudes about private-sector employment.

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Test, measure, and evaluate the impact of policy initiatives before and during implementation.

Implementing the right policy initiatives and achieving the desired outcomes requires rigorous analysis and objective, fact-based decision making. Even before new initiatives are implemented, governments can use a number of tools to evaluate their potential impact. For example, “strategic simulations” can help test new ideas and assess risk-reward tradeoffs. Simulations can also be used to bring together knowledgeable stakeholders—from both the public and private sectors—to replicate or model anticipated decisions in the future and evaluate anticipated outcomes in advance. In particular, participants can identify unforeseen problems and develop practical solutions for how to address challenges. Pilot programs can also be used to test and refine initiatives before committing significant resources to them.

Once initiatives are implemented, public and private sectors organizations should measure and evaluate the effectiveness of the programs. The strategic simulations held in advance of implementation can help identify the appropriate measures and targeted outcomes. Effective measures require participating organizations to put in place information systems and processes for collecting, sharing, and analyzing data. Decision-support systems can provide significant long-term payoffs in guiding modernization efforts and putting programs on the right track from the outset. Such efforts will provide government and business leaders with the information they need to make fact-based decisions in designing and implementing national economic strategies.

GCC nations already have a good starting point for applying metrics and measuring progress: Their long-term strategies for economic development. These plans outline national goals and, with varying detail, lay out strategies for achieving those goals. By objectively measuring progress, GCC nations can assess the effectiveness of their efforts, make mid-course adjustment as necessary, and ensure accountability among those tasked with responsibilities. For example, each of the UAE’s ministries and regulatory agencies has been assigned three-year Key Performance Indicators to measure their progress in achieving the nation’s Vision 2021 strategy, according to New York Times columnist Thomas Friedman.2 Dashboard displays measuring progress are reported weekly to UAE’s ruler, Sheikh Mohammed bin Rashid.

It should also be noted that the introduction of metrics sometimes meets with resistance, because people fear that the measures will be used to find fault and punish. Consequently, leaders should strive to use metrics as a guide to help people achieve goals, emphasizing that accountability recognizes and rewards achievement. Ultimately, success depends on accountability.

2 “The Other Arab Awakening,” November 30, 2013.

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Mount a national communications campaign to garner widespread participation and support for economic programs.

The public and private sectors should strive to improve communications not only with each other, but also with their citizens. Ultimately, success depends on national citizens embracing national economic and workforce development programs. GCC leaders recognize the cultural hurdles that can slow progress, such as the negative view of private-sector work among many nationals. A persuasive communications plan will help citizens understand their nations’ economic vision and plans. Among its key messages are:

• Long-term economic success requires GCC nations to build strong and diversified private-sector economies;

• Creating sustainable upward mobility for citizens will require moving the focus away from raising wages and hours today to acquiring the skills needed for long-term growth;

• Personal responsibility, accountability, and striving for excellence are essential to both individual and national success;

• GCC nations and their people have a strong foundation upon which to seize opportunities for innovation and growth;

• GCC nations and businesses are investing in infrastructure, training, education, and other areas to help their people and nations succeed;

• Achieving national aspirations will depend on the support and buy-in of national citizens.

One way to communicate these messages would be to publicize examples of people and companies in the private sector who have achieved success by practicing the entrepreneurial principles and values essential to the economic prosperity of their countries. Effective communication will require sensitive attention to cultural norms and expectations regarding the workplace and economic activity. Transparency and dialogue are essential for success.

Conclusion: Marshaling the Megacommunity for Economic SuccessThe transition from an oil-centric to a diversified economy is a complex undertaking. It will require changes in regulatory policies, business structures, and education and training. It will impact cultural norms regarding entrepreneurship, competition, employee responsibility and accountability, and the respective roles of the public and private sectors. No single government agency or private-sector organization can carry it out on its own. Achieving this ambitious goal will require the collaborative effort of the entire megacommunity of stakeholders in each GCC nation: government agencies, business leaders, education and vocational training organizations, workers, municipal governments, and other stakeholders. National governments, of course, will take a leading role in convening and guiding the megacommunity, but ultimate success will depend on how well all interested parties work together. Even then, it will not be enough simply to generate new ideas and formulate a general strategy. The most important challenge will be designing and successfully implementing a long-term plan for carrying out the strategy. This will require close cooperation among ministries and stakeholders within government as well as between government and the private sector as they collaborate in crafting practical solutions, creating systems to measure progress, establishing mechanisms for resolving conflicts and addressing the inevitable challenges that will arise, and using fact-based decision making to move forward along the chosen path. In this way, GCC nations can tap into existing strengths and resources, particularly the talents of their people, to build a thriving and resilient economy that supports expanded employment of nationals, sustains long-term growth, and solidifies their role in the global economy.

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