Dubai: The GCC countries could gain up to $17.7 billion (Dh65 billion) if they were to achieve average economic diversification levels of OECD [Organisation for Economic Cooperation and Development] according to a global benchmark study on diversification.

The EY [Ernst & Young] study uses a tracker to look at the levels of diversification across the GCC and how to speed up progress.

“With recent oil price volatility, diversification has returned to the top of the GCC agenda; it’s an opportunity worth $17.7 billion. To put that into context, it is more than three-quarters of the entire flow of foreign direct investment to the GCC region for 2013,” said Gerard Gallagher, MENA Advisory Leader, EY.

The EY Diversification Tracker, which benchmarks the GCC countries both globally and against each other, provides a standardised basis for assessing the degree to which economies have moved away from dependence on oil. It focuses on three aspects such as export complexity, the share of the non-oil sector and private versus public sector spending, which have been combined to give a percentage of diversification relative to the highest global performer.

Sweet spot

The report identifies a “sweet spot” where regional strengths, economic impact and nationals’ employment preferences meet, allowing all three factors to be achieved.

“The best drivers of diversification are those that have the strongest linkages with the rest of the economy. These sectors are said to have a high economic multiplier: in other words, a dollar of investment translates into far more than a dollar of GDP due to the stimulation of other sectors. Sectors that fall in the sweet spot include: transport, financial services, retail and tourism, telecoms and R&D,” said Gallagher.

The analysis of multiplier sectors in hydrocarbon economies shows that additional investment in oil and gas brings the least additional return to GDP at $1.30 and affects just 7 other sectors. Construction is at the opposite extreme. It has the highest economic multiplier, averaging an impact of US$1.80 in GDP for every dollar invested in construction activity. This trickle down feeds into almost every other sector.

“The key is not for governments to pump more public money into these sectors. The public sector needs to shift from being the main investor to being the enabler and driver of business, resetting the incentives, removing regulatory obstacles, encouraging collaboration and providing world-class infrastructure and services,” said Michael Hasbani, New Markets Leader, Mena Advisory Services, EY

Job creation

Creating jobs will be a critical outcome of diversification. However, diversification does not automatically create jobs that are viable substitutes for public sector employment. Creating private sector jobs will not ensure employment for young nationals unless they are taught the technical skills and professional attitudes that would both motivate and enable them to take on the increasingly demanding jobs that the knowledge economy brings.

To tackle this issue, many of the Gulf countries have been working to improve their education systems and have developed innovation ecosystems, encouraging technical research and entrepreneurship.

“The window of opportunity to break the reliance on oil and gas is now, but it will require new and innovative approaches to make it happen. It is time to truly capitalise the collective strength of the GCC, integrating our economies and harmonising regulations to encourage long term, sustainable prosperity and fulfil our global ambitions,” said Hasbani.