gcc countries and the world: scenarios to 2025: executive summary

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The GCC countries have benefited enormously from oil and gas reserves and assets that have generated significant financial liquidity in the six years between 2001 and 2007. The present wealth poses an interesting question for those interested in the future of the GCC countries, and one which these scenarios seek to address: How can this wealth be put to use to ensure that theGCC countries expand in affluence, while overcoming the internal and external pressures that could shift them from the path of sustainable prosperity?

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Page 1: GCC Countries and the World: Scenarios to 2025: Executive Summary
Page 2: GCC Countries and the World: Scenarios to 2025: Executive Summary

The GCC countries have benefited enormously

from oil and gas reserves and assets that have

generated significant financial liquidity in the six

years between 2001 and 2007. The present

wealth poses an interesting question for those

interested in the future of the GCC countries, and

one which these scenarios seek to address: How

can this wealth be put to use to ensure that the

GCC countries expand in affluence, while

overcoming the internal and external pressures

that could shift them from the path of sustainable

prosperity?

Key Questions for the Scenarios

From amidst the many drivers identified by

project participants, the scenario process

identified two ‘focal questions’ that have the

ability to alter the fortunes of the GCC countries

in the next two decades:

• Will leaders in the GCC countries be

willing and able to implement the

necessary economic and political reforms

and enforce the rule of law, both in public

and in private governance?

• How can the GCC countries maintain

internal order and stability, in particular

vis-à-vis a complex and uncertain

regional situation?

As important as these questions are, more

crucial are the insights that can be gleaned

from considering what these questions imply.

In positing three possible futures which address

them in different ways, two key themes

consistently emerged as being crucial to the

future of the GCC countries:

• Education and innovation: The GCC

countries face the challenge that their

collective oil reserves, while vast, will not last

forever. Nor are oil and gas always a reliable

source of wealth; there have been many

times where GCC budgets were in deficit

and public debt rose as a result of falling

energy prices. However, in attempting to

diversify away from oil, the GCC countries

face a major problem in that their existing

skill base for workers is low by world

standards and relatively little research,

development and innovation are occurring

in the region. This creates an impediment

to development and exacerbates other

problems associated with importing both

foreign workers and technologies. As a

result, the way in which education policies

are handled by GCC governments will be a

significant determinant of the region’s ability

to develop as innovation-based economies

that do not wholly rely on natural resources.

• Leadership and governance: The GCC

countries are ruled by traditionally-organized

family groups, with varying underlying

executive, legislative and judicial models.

Leadership and governance will therefore be

instrumental in determining the path that the

GCC countries will take over the next 20 years.

Although much is being undertaken today in

terms of reform to improve the efficiency and

openness of these systems, the strategies

chosen and the rates of change vary between

GCC countries. In managing both internal

stability and reforms, leadership plays a

critical role at all levels of GCC government

as well as in the private sector.

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Page 3: GCC Countries and the World: Scenarios to 2025: Executive Summary

Scenario Paths

Three different paths for the GCC countries

through to 2025 are represented in figure 2.1,

displayed as movements through a matrix

defined by the focal questions above.

Will the GCC countries successfully insulate

themselves from ongoing regional instability in

order to respond to internal pressures, firmly

establishing the rule of law and achieving

effective governance and institutional reforms?

Oasis is a story where a focus on technocratic

governance and top-down institutional reforms

pays off in the form of a well-organized, cohesive

and prosperous regional grouping. The region’s

economic growth, however, remains partially

constrained by over-regulation and less-inclusive

globalization.

Will GCC governments allow regional

tensions to spill over and affect their internal

security, resulting in a focus on short-term

solutions at the expense of tough reforms?

Sandstorm is a scenario in which dramatic

regional events and domestic unrest contribute

to the GCC countries failing to maintain

their momentum of reforms, with negative

consequences for the region’s economic and

social development.

Will GCC governments succeed in taking

advantage of globalization in a more stable

regional environment through bold reforms at

the institutional and political levels? The Fertile

Gulf is a future where GCC governments invest

heavily in education and innovation in order to

create a healthy private sector while encouraging

reforms through a bottom-up process. This results

in a more socially integrated and economically

diversified region that occupies an increasingly

relevant position in the international scene. 7

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Oasis describes a scenario where regional stability

continues to be a challenge for the GCC countries, which

are nevertheless able to achieve substantial institutional

reforms. The GCC countries develop strong identities and

work together to coordinate diplomatic and economic policies

through technocratic governance and a strong internal

market. Over-regulation slows the process of globalization,

impacting the GCC countries; nonetheless, they are an oasis

of stability and prosperity in an otherwise troubled region.

The story is written as a press conference by a member

of the Kuwaiti leadership and a Saudi technocrat delivered

in Kazakhstan in December 2025.

Sandstorm describes a future where regional instability

is a defining factor, affecting the ability of GCC countries to

effectively carry out much-needed institutional reforms.

In a depressed global environment, reforms deflate or collapse

due to a lack of attention to the root cause of internal issues

and a tendency for governments to focus on short-term stability

at the expense of long-term solutions. Caught in a shifting,

violent environment, the GCC countries are blinded, unable to

navigate their way out of the sandstorm and identify

opportunities for prosperity for their populations.

This scenario is written as a transcript of a televised debate

on Arab satellite television, discussing the progress the GCC

countries have made from the vantage point of 2025.

The Fertile Gulf describes the rise of the GCC countries

as innovation hubs in a global environment characterized

by strong demand for energy and increasing globalization.

Regional stability gives the GCC countries the opportunity

to focus on enhancing their human capital at all levels,

investing heavily in education while proceeding carefully

with political and institutional reforms to support their growing

economies and societies. In this way, a fertile garden of

prosperity is established along the Persian Gulf.

Written as a business magazine interview, The Fertile Gulf

is an account of the experiences of a successful young

entrepreneur from the GCC region, who has taken advantage

of the changes between 2007 and 2025 to develop a range

of global enterprises.

Oasis

Sandstorm

The Fertile GulfThe

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Page 5: GCC Countries and the World: Scenarios to 2025: Executive Summary

2007-2012: Growing tensions and insecurity spur a seriesof multilateral conferences involving the leadership of GCCcountries; the problem of regional violence is addressed atpolitical and cultural levels, resulting in increased regional stability.At the same time, recognizing the importance of education andinnovation, a number of GCC governments decide to spend theirbuilt-up wealth on educating their people and jump-startingresearch and development in a radical and dramatic fashion.Encouraging entrepreneurship by creating more business-friendlyregulatory and institutional environments and establishing fundsfor the development of new business ideas, the GCC countrieseffectively begin to emulate the ‘Silicon Valley’ model.

2013-2020: Less volatile, but still bullish, oil markets don’t distractGCC countries from private, non-energy sector development,the success of which reduces national unemployment whilecreating an array of sought-after, highly skilled jobs for thosecoming out of the newly reformed education system. A series ofinternational bilateral agreements to financially support researchprojects in exchange for IP rights results in an innovation explosionin the GCC countries. Incremental improvements in institutions tomanage the burgeoning entrepreneurship combined with a moreinfluential business community further support regional development.

2021-2025: Political reforms, which have proceeded at differentstages across the GCC countries, find balance; Western democraticideals are not directly ‘transplanted’. Instead, governmentsgenerate their own models of participatory governance over aperiod of experimentation and increasing engagement with theirpopulations. After a sea change in both attitudes to and theprovision of tertiary education, Arab graduates are keenly soughtafter for positions in finance, engineering and medical sciencesin Europe, Asia and North America. The GCC countries emergeas an innovation hub, where the constraint of demographics isturned into a world-class asset.

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2007-2012: As tensions rise in the Gulf with regard to Iran andproblems persist with sectarian and insurgent violence in Iraq,the GCC progressively develops a coordinated regional economicstrategy to make the most of relatively high oil prices. There isa focus on building the private sector through targeted incentivesfor domestic and foreign investment. The skills shortage beginsto be addressed by educational reform aimed at enhancinghuman capital in strategic sectors.

2013-2020: Nuclear proliferation causes regional concerns andincreases the volatility of the oil price. Efforts to accelerateeconomic diversification continue with strategic R&D investments,capturing more of the energy value chain, and increasing the worldmarket share of associated industries. Educational standards areestablished across the GCC countries to create a deeper, regionallabour market. A particular focus is the creation of public affairsmanagement colleges to educate a generation of technocratsin order to increase the effectiveness of the public sector.

Political reforms progress slowly, with pressures from localpopulations managed through a combination of financial incentivesand partial inclusion through (mostly symbolic) consultative bodies.

2021-2025: Governance structures in 2025 are profoundlydifferent from those in 2007. A generation of talented, nationallyeducated technocrats ensures that, for the most part, GCCnational institutions are efficient and effective. Ruling familiesprimarily act as occasional advisors rather than executive leaders,and there is a strong meritocratic culture throughout the publicand private sectors. Governments are focused on refining theirindustry policies, which occasionally fail, but which have beenfairly successful in a global environment characterized by solidgrowth. Oil continues to be the primary source of budget revenuefor the GCC countries due to the fact that oil prices are robust.

2007-2012: The Gulf region is thrown into chaos in 2009when the US undertakes a military strike against Iraniannuclear sites, provoking Iranian missile attacks on US basesin GCC countries along the Gulf and helping to precipitatea global recession. In addition, populations in GCC countriesreact strongly, resulting in a period of internal instability.GCC governments scramble to head off internal andexternal threats to their authority.

2013-2020: In a depressed global environment, reformsdeflate or collapse due to a lack of attention to the rootcause of internal issues and a tendency for governmentsto focus on short-term stability at the expense of long-termsolutions. What oil revenue exists is diverted, in attemptsto ensure regional security through extensive armspurchases, investment in non-productive assets and capitalleakage to Europe. A series of terrorist attacks causes Gulfpopulations to carefully consider their internal security.

2021-2025: The GCC countries are caught in a trap ofneeding to control their populations out of fear of furtherunrest, but being thereby unable effectively to create theconditions for renewed growth, despite rising oil revenues.Thanks to resilient populations making the most of theglobalization of communication, a new sense of identityemerges although the broader humanitarian cost isconsiderable – and at least partly avoidable. Succeedinggenerations hope to make a better start in 2025, but theyhave far less to work with than they might have had.

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Comparing the three scenariosThis table provides a comparison of some of the most import aspects of the scenarios, with more

analysis presented in section 6.

Exploring the Future of the GCC countries and the WorldThese storylines were developed by the project team in conjunction with approximately 80 thought leaders,

workshop participants and experts. The scenarios are supported by detailed economic and energy modelling

provided by our research partners. Boxes on selected topics have been included within the scenarios, and

presented in creative formats to further illuminate the key drivers that will shape the GCC countries as well as

provide depth to the stories.

We now invite you to turn the pages, travel through time, and see for yourself what the future of the GCC

countries and the world may be like over the next 20 years.

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Oasis

Globalization continues, temperedby security concerns. Morecoercive rules and regulationslead to less integration betweendifferent cultures and societies.

Solid economic growth issupported by robust oil pricesand a focus on diversificationthrough industry policy. Incomedisparity widens.

Unbalanced development.Social discontent managed byeffective institutions andcontinuation of the welfare state.

Effective relations with Asiaand the West are driven bycohesiveness within the GCCcountries. Regional instabilityremains a challenge.

Strong institutional governancesupports current rulers. Minimaldemocratic reforms, despitegreater consultation.

Sandstorm

Security issues, domesticconcerns and national focusdominate.

Low oil prices due to a pricecrash in 2011 create budgetand debt problems for GCCgovernments. Private and non-oilsectors languish in anunfavourable regional andglobal environment.

Significant social tensionsexacerbated by threat ofterrorism, breakdown of thesocial welfare system andincreasing income inequality.

Continued reliance on the USfor security, driven by regionalinsecurity and reactive externalrelations.

Insecure leaders focus on short-term stability. Institutionaleffectiveness and long-termvision neglected.

The Fertile Gulf

Heightened globalization.More cohesive societies andintegrated cultures.

High oil prices, strong globaldemand, market mechanismsand significant investment ineducation and innovationproduce rapid GDP growth andencourage economicdiversification.

Balanced social development,characterized by growth in civilsociety. More equitabledistribution of income acrossclasses, including foreign workers,through market mechanisms.

Respected international player.Regional security agreementsensure stability throughout theGulf.

Proactive leadership empowerspopulations. Participatorygovernance encouraged.

Global environment

Economic performance

Social development

External relationships

Leadership andgovernance

Page 7: GCC Countries and the World: Scenarios to 2025: Executive Summary

The following section allows a side-by-side comparison of the evolution of some key economic

and social indicators as featured in each scenario. The various futures described in the scenarios

have been quantified using macroeconomic and project-driven energy modelling to ensure

plausibility and consistency.

In Oasis, globalization continues despite regional conflict throughout the world, but friction in

global markets caused by security concerns means that global growth averages around 3-3.5%

throughout the period. In contrast, in Sandstorm, oil shocks and a lack of trust undermine

international cooperation and trade integration, causing a global recession in 2010-2012, followed

by slower growth thereafter. In The Fertile Gulf, the global economy benefits from increasing

globalization and trade in a harmonious global environment and reaches growth rates of over 4%.

Source: Oxford Economics

Global GDP Growth

0

1

2

3

4

5

2006-2010 2011-2015 2016-2020 2021-20252001-2005

Actual Projected

Oasis The Fertile GulfSandstorm

Perc

enta

ges

1. Global GDP growth

Annex: Comparing the Three Scenarios

Annex:Comparing

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Figure A.1

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In Oasis, a downward slide in oil prices occurs after 2006, thanks in part to a slowing of the world economy and increasing non-

OPEC supply as large projects come online. OPEC successfully defends a floor of $45 per barrel, and by the end of 2016 a

rising call on OPEC occurs, excess cap is being reduced and prices achieve a new range of approximately $100 by the end of

the period. In Sandstorm, a global slowdown causes a fall in oil prices, which dramatically reverses itself due to the US

bombing of Iran in 2009, when prices shoot to an average of $125 per barrel. The resulting regional instability and sudden oil

price shock combines with economic weaknesses in the US market to precipitate a global slowdown and a reduction in oil

demand over a four year period, dramatically pushing prices down as OPEC is unable to adjust quickly enough in a coordinated

fashion. From 2016, recovery is slow due to festering problems in geopolitics; however, a reduction in non-OPEC supply due to

delayed projects means that OPEC is able to defend a floor of $45 in real terms until 2025. In The Fertile Gulf, strong global

demand for oil of almost 2% per annum (driven particularly by China and India), capacity constraints and delays affecting some

large non-OPEC projects drive a rise in prices from 2009-2012. Saudi Arabia’s excess capacity falls under 2mbd as production

rises above 12mbd, causing sustained price rises, tempered somewhat by increased output from Iraq. However prices are well

over $110 in 2025.

2. Oil price

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Source: PFC Energy

Oil Price Figure 6.2

0

20

40

60

80

100

120

140

160Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

US$

(nom

inal

)

Oasis The Fertile GulfSandstorm

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Source: PFC Energy

Call on OPECFigure 6.4

15

20

25

30

35

40

45

50Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

Milli

on B

pd

Oasis The Fertile GulfSandstorm

3. Global Oil demand

The call on OPEC remains very strong and rises to unprecedented levels in both The Fertile Gulf

and Oasis scenarios. OPEC demand lowers in Sandstorm due to a combination of falling global

demand and an increasing supply of non-OPEC capacity as new projects come online. However,

following a global slowdown, increasing demand and non-OPEC capacity restraints mean the call

is able to expand until the end of the period.

In The Fertile Gulf and Oasis, global oil demand is driven by continued globalization and growing

demand from China and India. In Sandstorm, the 2009 - 2011 global recession, due in part to

geopolitical shocks in the Gulf region, results in a lower demand for oil. After this period of

economic decline, the oil sector recovers.

4. Call on OPEC

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Source: PFC Energy

Oil demandFigure 6.3

60

65

70

75

80

85

90

95

Oasis The Fertile GulfSandstorm

Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

Milli

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pd

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Source: PFC Energy

GDP Growth RatesFigure 6.6

-15

-10

-5

0

5

10

Perc

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2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

Oasis The Fertile GulfSandstorm

In all scenarios, Saudi Arabia remains the dominant producer of oil among the GCC countries. In

Sandstorm, Saudi Arabia acts as the swing producer and lowers its output by 20 to 30% when

the world economy experiences a slowdown.

In all the scenarios, GDP growth rates are influenced by the oil price. In Sandstorm, the

collapse in oil prices following the US-led bombing of Iran leads to a period of negative growth

rates in GCC countries.

Source: PFC Energy

Oil production for GCC countries (million Bpd)Figure 6.5

Saud

ia A

rabi

aOt

hers

2006-2010 2011-2015 2016-2020 2021-20252000-2005

9.9

9.2

6.5

6.0 5.1 6.0 6.6

6.1

6.2 6.2 6.75.7

6.3 7.2

9.2 10.9 12.3

8.8 8.8 8.3 10.88.3

9.7 11.4 12.8

6.0

5. Production by country

6. GCC GDP growth

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Source: PFC Energy

Real GDP per CapitaFigure 6.7

Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

US$

(200

0 do

llars

)

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Oasis The Fertile GulfSandstorm

Source: PFC Energy

Total GCC Budget BalanceFigure 6.8

-200

-100

0

100

200

300

400

500

600

700 Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

Milli

on U

S$ (n

omin

al)

Oasis The Fertile GulfSandstorm

Real GDP per capita reflects economic output by keeping all commodity prices, including oil, at 2000 levels. This

neutralizes the effect of the oil price and other price factors on GDP, providing a more comparable measure of output

for the scenarios. Although there is strong GDP growth in both Oasis and The Fertile Gulf, this translates into

modest real growth on a per capita basis due to population increases. Similarly, the recessionary environment in

Sandstorm combined with a rising population means that real GDP per capita falls significantly over the period.

The combined GCC government budgets remain highly correlated with the oil price in all three scenarios. In Oasis,

declining oil revenues and a rising population creates a budget deficit by 2011, which is corrected in 2013 by

a recovery in the oil price. In Sandstorm, following the oil price spike in 2009, a dramatic downslide in oil revenues

combined with falling volumes creates significant deficit with a sluggish recovery from 2015 onwards. This general

statement varies greatly across the individual GCC countries, with Qatar, the UAE and Oman remaining in

surplus, while Bahrain, Kuwait and Saudi Arabia experience deficits. In The Fertile Gulf, the GCC countries

as a whole benefit from large revenues from oil, keeping the combined budget in surplus.

7. GDP per capita

8. Budget performance

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Source: Oxford Economics

Number of foreign workersFigure 6.10

4

5

6

7

8

9

10

11

Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

Milli

ons

Oasis The Fertile GulfSandstorm

In Oasis and The Fertile Gulf, the share of the non-oil sector increases smoothly, although there

are slight variations between the two driven by different policies to spur diversification. In Sandstorm,

the oil-price shock in 2009 and resultant global recession temporarily reduces the output of the

non-oil sector, which remains static as a proportion of total output, hampered by a lack of

institutional reform and weak global demand.

Foreign workers remain important in all scenarios given the low national population levels in

GCC countries. The overall levels, however, vary greatly with the scenario. In Oasis, their

absolute numbers decrease as the need for construction workers lowers. In Sandstorm, the

global recession, volatile oil prices and regional instability mean that demand for foreign workers

is significantly lower. In The Fertile Gulf, having reached almost full employment, the demand

for foreign workers remains strong as many of them are now highly skilled foreign workers.

Source: PFC Energy

Share of Non-oil Sector in Real GDPFigure 6.9

Perc

enta

ges

Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 202450556065707580859095

100

Oasis The Fertile GulfSandstorm

9. Non-oil sector

10.Foreign worker employment

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Source: Oxford Economics

Unemployment RateFigure 6.11

0

5

10

15

20

25

Actual Projected

2006200420022000 2008 2010 2012 2014 2016 2018 2020 2022 2024

perc

enta

ges

Oasis The Fertile GulfSandstorm

Unemployment rates vary largely among the three scenarios. In Oasis, unemployment levels hover

around 10 – 12%, indicating that despite regional instability, strong demand for oil and institutional

reforms have paid off. Starting from about 17% in 2005, the GCC countries are able to reduce

unemployment to 5% in The Fertile Gulf as the benefits from diversification become apparent.

Unemployment rates in Sandstorm are consistently high, and rising towards the end of the period.

11.Unemployment

Using the data

The data can be used for developing leading indicators to determine which of the three scenarios

is likely to unfold at any point in time. Users should bear in mind that the scenarios and related

analysis are descriptions of a set of possible futures as seen from the current perspective, and

should not be seen as forecasts or predictions. The data provided therefore serves only as a guide

to possible trends, and should be monitored, interpreted and applied with careful judgment.

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