GCC oil exporters must change the prevailing economic model to achieve diversification in their effort to overcome the impact of lower revenues, the IMF Middle East Centre for Economics and Finance (CEF), said.
Despite the complex choices involved, it is paramount for oil-dependent economies to become innovative economies, said IMF economists Dr Reda Cherif and Dr Fuad Hasanov.
Addressing a symposium, they said GCC oil exporters would have to experiment and learn from the experiences of other countries on their path to diversification.
"In the past, countries such as Brazil, Korea, Malaysia and Singapore have made major strides in diversifying their economies, and their experiences carry important lessons for the GCC countries today," they said at the seminar entitled 'The path to economic diversification in Kuwait and other GCC countries'. The event was held jointly with the Arab Fund for Economic and Social Development (AFESD).
They said experiences of those countries reveal that incentives for firms and workers need to be realigned to develop technologically sophisticated export-oriented industries.
"Standard growth policy prescriptions may not be sufficient to achieve true diversification. In addition to addressing government failures, policymakers must address market failures by changing incentives for firms and workers to move towards more dynamic sectors. Policymakers should focus on developing dynamic export markets," the IMF economists said.
"Dealing with low oil prices in the current context of high government spending and rising expectations about the provision of jobs and income transfers is even more challenging," the IMF economists said.
Diversification, they pointed out, has to start somewhere and can begin by focusing on a more limited set of industries.
"Facilitating entrepreneurship is essential while education and social development are paramount. The choice to diversify via the service sector versus the manufacturing sector depends on the potential productivity gains. The frontier between services and manufacturing is fading, and there are more productivity gains to be had with service sectors that are more strongly linked to the manufacturing sector," Cherif and Hasanov argued.
CEF Director Oussama Kanaan argued that the adoption of a bold diversification strategy has become particularly important in the face of low oil prices, and a critical one to prevent a marked decline in GCC countries' living standards.
Drawing on international country experiences, the panel discussion brought to the fore the core ingredients of successful economic diversification strategies, including infrastructure and human capital investments conducive to private sector growth and the development of sophisticated non-oil export industries.
The panel discussion, moderated by Kanaan, also featured Professor Ha-Joon Chang of Cambridge University.