Business | Economy
Economies in Gulf need to diversify
The low level of economic diversity makes Gulf economies prone to high volatility in growth and contagion effects - the tendency of failure in one economic or financial arena to spill over into other arenas - according to a study by Booz & Company.
- By Babu Das Augustine, Banking Editor
- Published: 23:49 August 10, 2008
Dubai: The low level of economic diversity makes Gulf economies prone to high volatility in growth and contagion effects - the tendency of failure in one economic or financial arena to spill over into other arenas - according to a study by Booz & Company.
Concentration ratio measures a nation's concentration in a given sector, while the diversification quotient is the inverse of the concentration ratio. In other words, the lower the concentration ratio and the higher the diversification quotient, the more diversified a nation's economy.
The study compared GCC economies with G7 economies, and transformation economies such as Hong Kong, Ireland, New Zealand, Norway, Singapore, and South Korea on the economic concentration ratio and a diversification quotient of the countries in the region.
"GCC countries have the highest concentrations in terms of sector contribution to GDP and thus the lowest diversification quotients," Rabih Abouchakra, a Principal with Booz & Company.
Many GCC economies, especially larger ones, have been susceptible to changes in oil prices. In Saudi Arabia, Growth in non-oil sectors has also varied due to fluctuations in oil prices. This suggests contagion effects in the economies.
Dubai's efforts
The UAE's GDP growth has been driven mainly by the oil and gas sector. "The UAE however, has recently experienced relative improvement in non-oil sectors as a result of Dubai's efforts toward economic diversification," said Chadi N. Moujaes, a Principal with Booz & Company.
According to the study being hydrocarbon-rich does not predestine economic concentration. Employment distribution generally reflects and shapes GDP distribution across sectors. In the GCC, employment is distributed unevenly, compared to G7 and transformation econ-omies with employment balanced across a variety of profitable sectors.
The oil and gas sector, producing 47 per cent of GCC countries' GDP, provides work for only one per cent of the employed population, with the majority of the workforce employed in sectors relatively less economically productive and of secondary strategic importance.
Government services constitute around 20 per cent of total GCC employment. Productivity is dir-ectly related to competitiveness; the more people and/or capital it takes to do a job or create a product, the lower productivity is, which in turn raises the product's price and lowers its potential for competition in the marketplace.
The study said that labour and capital productivity are key measures of sustainable economic development. GDP labour productivity in GCC countries is estimated at $1.6 million per employee for the oil and gas sector but only $9,300 per employee for construction.
"Poor economic diversification - the over reliance on a single dominant economic sector - has an unfavourable effect on the productivity and competitiveness of other lagging sectors," said Moujaes.
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