Mark of sophistication is Gulf’s need as well as desire

New year, new knowledge and new awareness, one would hope. While it’s easy to recognise that in terms essentially of human nature and activity there’s nothing new under the sun, as they say, it’s equally easy and important to realise that there are always lessons to be learnt (or probably relearned), and, strangely enough, nothing stays exactly the same.

An example of both, apparently opposite, truths came my way this week upon reading a summary of the IMF’s research published last month on the need for the Gulf states to diversify their economies and earnings. Lessening their dependence on energy receipts thereby remains an achingly familiar line of argument, albeit one recurrently restated and updated.

Naturally, the prompt has been the hefty drop in oil prices, whose implications are obvious enough as far as immediate revenues are concerned, while the medium-term prospect is less clear, and may be much less downbeat for the low-cost producers of the region. That’s particularly so as the world economy is liable to pick up, and impart more demand for crude, precisely as a consequence of the current retreat in fuel, transport and associated costs.

So what was the fresh element in the IMF’s staff paper that caught the eye, at least of this reader?

Frankly, I had not heard before of the concept of ‘export sophistication’, which, needless to say, has actually been around for quite a while, and which offers an insight to the diversification agenda. On the face of it, though, by suggesting that quality rather than merely quantity of output is a decisive characteristic of prolonged economic success, the term seems to offer a welcome peek behind the bald numbers that feature in debate, getting instead into the nuts and bolts of what really works.

“Historical experience offers few examples of countries that have been able to successfully diversify away from oil,” the memo observed, while citing Malaysia, Indonesia and Mexico as perhaps the best examples of so doing.

To succeed, “a number of common themes are evident”, it said, namely (i) that diversification took a long time, and sprang forward only when oil revenues began to dwindle, (ii) incentives were put in place to develop other markets and enhance entrepreneurship, besides supporting labour skills and education, (iii) focus was still placed on a stable economic environment and favourable business climate.

Those countries invested in specially-formed clusters, even without prior competitive advantage, rejecting import substitution in favour of pursuing productivity gains, and developing horizontal and vertical linkages among related sectors. Foreign capital was invited to promote vital technological transfer, and the private sector was encouraged to grow by way of financing and other assistance from development banks, venture capital funds and export promotion agencies,

Despite efforts in these directions, the report says, unfortunately for the GCC there remains the distorting effect of the current distribution of oil revenues, particularly in “using the public sector as the employer of first and last resort”, without emphasising private sector employment, and job search activities alongside an accompanying social safety net.

This latest submission from the IMF’s portals draws on a paper issued in September last year, wherein the authors said their guidance deviates from previously standard policy advice that basically concentrates on liberating and enhancing the supply side of the economy. In particular, targeting the creation of high-value-added industries in manufacturing and innovation entails a certain manner of state intervention, even while seeking the boost of market orientation.

As for the export sophistication criterion, that refers specifically to the need constantly to produce new tradable outputs; otherwise stagnation occurs, as total factor productivity data in the GCC have shown. In this regard, simple output diversification per se and the rate of non-oil growth are misleading indicators of progress. Heavy industrialisation on the basis of comparative advantage in energy inputs, for example, is suboptimal since it is capital-intensive, and doesn’t generate linkages around the economy. Similarly, advancing infrastructure projects doesn’t itself encourage growth of the tradable sector, which is known to lead to healthier, sustainable growth over time.

Export sophistication itself can be measured, being defined as the export-share weighted average of sophistication levels of the country’s export basket. That in turn is gauged by the proxy of the weighted average of real GDP per capita of all countries exporting the same product.

And the time frame for countries embarking on this exercise? The report’s authors say “it would take twenty to thirty years to achieve high export sophistication”, a project quite separate from the reforms to taxes and subsidies that would create the budgetary room with which to underwrite the endeavour.

That leads to the thought, as the map-reading joke has it about finding directions: you wouldn’t start from here and now. You would start from many years ago, which is why the knowledge-based economy efforts already seen have not been a moment too soon.