A Talk on Diversification Reda Cherif and Fuad Hasanov - - PDF document

A Talk on Diversification

Reda Cherif and Fuad Hasanov

International Monetary Fund

Central Bank of the UAE

May 23, 2016

DISCLAIMER: THE VIEWS EXPRESSED HEREIN ARE THOSE OF

THE AUTHORS AND SHOULD NOT BE ATTRIBUTED TO THE

IMF, ITS EXECUTIVE BOARD, OR ITS MANAGEMENT.

Avoiding Another Large and Lasting Decline in Welfare…

5 10 15 20 25 30 35 40 45 50 75 80 85 90 95 100 105 110 115 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Constant (1982-84) $/barrel Index (1980=100)

Real Consumption per capita and Real Oil Price, 1980–2010

Real Consumption Per Capita (PPP) Real Oil Price (RHS) Average NFA/GDP: 3 percent in 1980 vs. 54 percent in 2006

…and Reversing Relative Income Decline

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

GDP Per Worker (PPP $), 1970–2010

The Current Model Relies Heavily on Oil

10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100

Average Oil Exports (% Exports)

1980s 1990s 2000s

1/ U.A.E. Goods and Services exports excludes re-exports.

The GCC Achieved Large Improvements in HDI and Living Standards

55 60 65 70 75 80 55 60 65 70 75 80 1980 1990 2000 2012 GCC Life Expectancy, 1980–2012 (Years) GCC Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

Yet Export Sophistication Has Not Improved

4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Constant $

Kuwait Oman Saudi Arabia U.A.E. Indonesia Malaysia Mexico

Goods Export Sophistication: 1976–2006

GCC Countries Have Attempted to Diversify Their Economies

• Development of petrochemical and metal industries

bear little linkages to the rest of the economy

• Promotion of services helped diversify economies but

services may not be sufficient for sustainable growth

– Focus on tourism, logistics, finance, etc.

• Recent attempts at creating clusters, technology parks,

and manufacturing industries in free zones have yet to yield substantial results

Standard Growth Policy Advice May Not Be Enough

• The Gulf countries have had high rankings in

infrastructure, doing business, competitiveness, and trade barriers indicators, but sustained growth per capita has not materialized

• Standard growth policy advice may not be sufficient – it

includes macroeconomic stability, minimum state intervention and an enabling environment conducive to investment in both physical and human capital

Tackling “Government Failures” I

20 40 60 80 100 120 140 160 180 200 20 40 60 80 100 120 140 Ease of Doing Business (Ranking among 183 countries) Global Competitiveness Index (Ranking among 134 countries)

Doing Business vs. Global Competitiveness Index, 2013

Singapore U.A.E Kuwait Bahrain Oman Saudi Arabia Qatar

Tackling “Government Failures” II

1 2 3 4 5 6 7 $500 $5,000 $50,000 Score GDP per capita Kuwait Bahrain Saudi Arabia Qatar U.A.E.

Quality of Infrastructure, 2013 (Score of 7 "meets the highest standards in the world")

USA

Tackling “Government Failures” III

• 20

20 60 100 140 180

• 20

20 60 100 140 180

Bahrain Kuwait Oman Qatar Saudi Arabia U.A.E. Chile Malaysia Mexico Indonesia Norway

Local competition intensity Prevalence of trade barriers Sources: The World Economic Forum's Global Competitiveness Indicators (2013-14).

Monopoly Related Indicators

(Rank 1 - 142, the lower rank the better)

Tackling “Government Failures” IV

10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100

Bahrain Kuwait Oman Qatar Saudi Arabia U.A.E. Chile Malaysia Mexico Indonesia Norway

Source: The World Economic Forum's Global Competitiveness Indicators (2013-14).

Burden of customs procedures

Norway: Falling Prey to Dutch Disease

• In 2012, manufacturing hourly wages were the highest

in the world and about double that of the US or Japan

• Unit labor costs increased by 50 percent in the 2000s,

whereas they declined in Germany and Sweden

• Annual average hours per worker declined by 600

hours since 1960 to about 1400 hours in 2012, third lowest in OECD

The Norwegian Disease: Norway Experienced Decline in Export Sophistication

4000 6000 8000 10000 12000 14000 16000 4000 6000 8000 10000 12000 14000 16000 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Canada Denmark Malaysia Norway

Goods Export Sophistication, 1976-2006

Breaking the Oil Spell

• High scores in infrastructure quality and other business quality

indicators in the GCC are better than in successful oil exporters

• Norway could not escape Dutch disease although government

failures are basically nonexistent there

• Firms choose to produce non-tradables over tradables because of

risk-return trade-off largely favoring non-tradables

• The standard growth recipe consists in tackling “government

failures” rather than “market failures”

• Diversification requires the leading hand of the state to create a

dynamic export sector

Non-Oil GDP is a Misleading Indicator

20 40 60 80 100 120 20 40 60 80 100 120 1990 1993 1996 1999 2002 2005 2008 2011 Agriculture Construction Transport Trade Manufacturing Mining Other

Bahrain - GDP by Sector, 1990–2011

(Share of total) 20 40 60 80 100 120 20 40 60 80 100 120 1990 1993 1996 1999 2002 2005 2008 2011 Agriculture Construction Transport Trade Manufacturing Mining Other

Singapore - GDP by Sector, 1990–2011

(Share of total)

It Is All About Exports

79.1% 9.9% 6.2% 1.5% 1.1% 0.8% 1.3%

Oil exports Aluminum Other Metals Chemical Food Processing Textiles Other Light Industry

Bahrain, Top 50 Exports of Goods, 2008 (Percent of total exports of goods) 24% 2% 1% 10% 11% 51% 1% Singapore Exports by Sector, 2008 (Percent of total exports of goods)

Oil Food Crude Materials Chemical products Manufactured Goods Machinery & Transport Equipment Others

Creating a Dynamic Export Sector

• Export orientation vs. import substitution/non-tradables
• Domestic capabilities vs. portfolio diversification (e.g.

Norway in the 1970s vs. petrochemicals/metals)

• Sophisticated exports vs. agriculture and services such as

tourism and finance

• Beyond vs. within comparative advantage (e.g.

Korea/Malaysia vs. Chile)

Changing Incentives for Firms

• Promoting and supporting exporters, e.g. policies for small

and medium enterprises (SMEs)

• Using development banks, venture capital funds, and

export promotion agencies (e.g. Brazilian Development Bank and SBIR in the U.S.)

• Creating industry clusters with links to universities, special

economic zones, start-up incubators, and research and development centers (e.g. Singapore)

• Investing in purpose-specific skills and infrastructure
• Providing a strict accountability framework for industries

and firms receiving support (e.g. Korea)

Changing Incentives for Workers

• Reforming the public sector from its role as the “employer
• f first resort” with generous transfers, pensions, and

subsidies

• Improving education quality through early childhood

programs, teacher quality enhancement programs, and training institutes and technical schools

• Changing social attitudes through “Saemaul Undong”-type

social development program

– The Saemaul Undong “…was in a sense, a movement for spiritual reform of Korean people, and has achieved a lot in this

• respect. It changed people’s attitude from laziness to diligence,

from dependence to self-reliance, and from individual selfishness to cooperation with others.” (Choe 2005)

Creating Winners

• The key is the development of domestic exporters and local

technology in sophisticated industries early on

• Picking sectors rather than firms while preserving competition

and “creative destruction”

• Enforcing market discipline and accountability is important but

difficult

• The main challenge is to fix incentives for firms and workers,

including social incentives

• Learning “piecemeal” from each other while on the path to

diversification

Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In

• ther words, we would not consciously

engage upon tasks whose success clearly requires that creativity be forthcoming. Albert Hirschman “The Principle of the Hiding Hand”