UAE and Saudi Arabia drive GCC's 'significant improvement' in economic diversification

The US, China and Germany retained their positions as the top three most diversified economies globally

The push for economic diversification by governments in the GCC makes the region a key growth market for non-oil sectors. AP

Gulf nations have made “significant improvement” in the diversification of their economies and have hastened their economic transformation policies after the onset of Covid-19, a study has shown.

The UAE and Saudi Arabia led the region over the past two decades, thanks to policy measures to develop their non-oil sectors, the latest global Economic Diversification Index (EDI) report released by the Mohammed bin Rashid School of Government said on Tuesday.

Since the start of the pandemic, which affected non-oil sectors ranging from tourism to infrastructure, GCC nations introduced policies to drive economic transformation.

The policies include the development of the digital economy, the privatisation of state-owned assets, the introduction of new taxes to increase non-oil revenue and other structural reforms, the report said.

While commodity-dependent nations have benefitted from the recent increase in commodity prices, the pandemic reinforced the efforts of GCC countries to diversify into new sectors, the report found.

This has ranged from a shift in manufacturing to produce more high-tech products, a growing focus on FinTech, artificial intelligence and virtual assets, as well as opening up markets to new investors — as characterised by the recent spate of initial public offerings in the GCC, in both the oil and non-oil sectors.

Meanwhile, International Monetary Fund managing director Kristalina Georgieva said on Monday that Gulf economies were performing well due to the “relentless” pursuit of reforms.

“There is this impression that the only reason the Gulf countries are doing well is high oil and gas prices — this is not true,” Ms Georgieva said at the World Government Summit in Dubai.

“They have been opening up more space for private investments and for jobs being generated by competitive businesses.”

The Mohammed bin Rashid School of Government released the study at the World Government Summit in Dubai.

The index, now in its second year of publication, has expanded to cover 105 countries in 2023, up from 83 last year. It covers all regions, resource and non-resource-based economies over a period of 22 years.

The index quantifies the economic diversification process of different countries by focusing on three aspects — output diversification, trade diversification and government revenue diversification.

The UAE's EDI score, measured out of 100, jumped to 94.6 in 2021, from 90.9 in 2000, while Saudi Arabia's score climbed to 89.9, from 81.8, in the same periods under review.

The Emirates has introduced a series of policies, from allowing 100 per cent foreign ownership of companies to more flexible visa programmes, to attract more capital and talent to the country.

Tracking the progress of economic diversification in commodity-dependent nations, the report found that while the Mena region had a relatively low score, its EDI score had increased at the fastest pace on the index.

The region's EDI score rose to 97.4 to 2021, from 92.3 in 2000.

“In the Mena region, the uptick has picked up pace in the last few years (2016 to 2019), not surprising since a conscious effort has been placed on increasing private sector non-oil share in GDP (plus the introduction of revenue enhancing measures like the introduction of value-added tax and excise taxes),” the report said.

The Mena region's improved score in the latter part of the past decade was attributed to efforts by oil-exporting countries to hasten their diversification plans, it said.

Around the world, North America topped the list, despite being the most affected by the pandemic in 2020 and 2021, when its score fell by 3.8 points to 130.5.

It was followed by Western Europe and the East Asia-Pacific region on the list of top performers.

Countries in sub-Saharan Africa were ranked at the bottom of the index, even though their score declined by only 0.1 points during the pandemic to 89.4.

While the region’s average scores mostly improved over time, Covid-19 negatively affected the 2020-2021 scores.

The most diversified economies globally were the US, China and Germany, which held on to their ranks for the second year, the report showed.

The research also examined how the pandemic had affected the economic diversification efforts of countries around the world.

Developing nations are taking longer to recover from the pandemic and remain more vulnerable to external shocks than developed nations, the report found.

The agriculture and services sectors suffered from the initial lockdowns, but the rebound in agriculture was faster, thanks to government support, increased global production of major commodities, trade recovery and higher food prices, it said.

The manufacturing sector was more resilient than services, with countries that had a strong production base having lower projected output losses, it found.

Trade in goods recovered to almost pre-crisis levels one year after the pandemic hit, suggesting some resilience in global value chains, while services trade continued to be sluggish, it said.

“The pandemic has underscored the need for trade diversification [both products and partners] and the enhancement of supply chains. It also highlighted that a country needs a broader tax base to have the necessary fiscal space to roll out emergency assistance,” it said.

The future of economic diversification

The report highlighted the importance of services in supporting diversification efforts and said overly restrictive government policies would hamper the growth of the services economy and the adoption of new technology.

A strategy of “servicification”, which is the focus on the role of trade in services, is also gaining ground, it said.

“It would be beneficial to develop new, deep trade agreements, including the broad category of services, and digital services [e-services, e-commerce, etc],” the report said.

“Such services trade policies can lead to higher labour and overall productivity, and increase diversification.”

With the pandemic having accelerated efforts to develop a digital economy, policymakers must now focus on the digital divide and work on narrowing the gap, the report said.