How to break the oil spell over OPEC

China Daily (Hong Kong) - - VIEWS -

One clear les­son for oil­ex­port­ing coun­tries in re­cent years, and es­pe­cially in 2016, is that they should ad­just their public poli­cies to pro­mote in­no­va­tion and di­ver­sify their economies. The agree­ment of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries in late Novem­ber to cut pro­duc­tion — the first in eight years — doesn’t change this, re­gard­less of the short-term in­crease in prices.

Oil rev­enues appear to have mag­i­cally boosted oil-ex­port­ing coun­tries’ GDPs over the last quar­ter cen­tury, es­pe­cially in the Gulf re­gion. To­day, many of th­ese coun­tries have bustling, cos­mopoli­tan cities with daz­zling sky­lines, world-class in­fra­struc­ture, and higher-than-av­er­age liv­ing stan­dards.

But the world in 2017 and be­yond will be dif­fer­ent. The down­ward pres­sure on oil prices re­flects not just lower global en­ergy de­mand, ow­ing to slower eco­nomic growth; it also stems from tech­no­log­i­cal changes in hy­dro­car­bon pro­duc­tion, the re­cent rise of re­new­able en­ergy sources, and global com­mit­ments to fight cli­mate change.

As a re­sult, many oil-pro­duc­ing coun­tries’ sole growth en­gine — hy­dro­car­bon rev­enues — is run­ning in low gear, and could con- tinue to do so for a long time, if not per­ma­nently. Yet as their re­cently agreed pro­duc­tion cap sug­gests, oil-ex­port­ing economies re­main overly de­pen­dent on it.

When oil prices stayed low dur­ing the 1980s and 1990s, oil-ex­port­ing coun­tries’ liv­ing stan­dards and em­ploy­ment rates fell, while their public debts sky­rock­eted. Oil prices have again been low since 2014, with oil-ex­port­ing coun­tries burn­ing through fi­nan­cial re­serves and some be­ing forced to cut spend­ing. This time, how­ever, they have amassed am­ple fi­nan­cial re­serves to weather a de­cline in oil prices. Yet they re­main un­der oil’s spell.

A re­cent book pub­lished by the In­ter­na­tional Mone­tary Fund, Break­ing the Oil Spell: The Gulf Fal­cons’ Path to Di­ver­si­fi­ca­tion (which I co-edited), sheds im­por­tant light on how govern­ments can re­ori­ent their coun­tries’ economies. The book dis­tills in­sights from coun­tries such as Brazil, the Repub­lic of Korea, Malaysia and Sin­ga­pore, where eco­nomic di­ver­si­fi­ca­tion has been suc­cess­ful.

Th­ese coun­tries are not ma­jor oil ex­porters, but they pro­vide pow­er­ful lessons none­the­less. In each coun­try, eco­nomic di­ver­si­fi­ca­tion ef­forts have fo­cused on high value-added in­dus­tries that com­pete in in­ter­na­tional mar- kets. Th­ese in­dus­tries then gen­er­ate pro­duc­tiv­ity gains, pro­duc­ing a pos­i­tive im­pact on other eco­nomic sec­tors. For ex­am­ple, in Malaysia, pri­mary com­mod­ity ex­ports, as a share of to­tal ex­ports, fell from about 80 per­cent to about 20 per­cent be­tween 1980 and 2012, while elec­tron­ics ex­ports in­creased from less than 10 per­cent to more than 30 per­cent.

Ac­cord­ing to Break­ing the Oil Spell, govern­ments that have di­ver­si­fied their economies have done so with poli­cies to im­prove “ac­cess to fi­nanc­ing and busi­ness sup­port ser­vices through ven­ture cap­i­tal funds, de­vel­op­ment banks, and ex­port pro­mo­tion agen­cies, and the cre­ation of spe­cial eco­nomic zones, in­dus­try clus­ters, re­search-and- de­vel­op­ment cen­ters, and startup in­cu­ba­tors.”

For ex­am­ple, Sin­ga­pore has es­tab­lished man­u­fac­tur­ing, sci­ence, and high-tech parks to pro­mote re­search and de­vel­op­ment and the emergence of in­dus­try clus­ters; and Brazil has made sub­stan­tial progress, with the sup­port of the Brazil­ian De­vel­op­ment Bank, in build­ing its phar­ma­ceu­ti­cal, sug­ar­cane and soft­ware in­dus­tries. Malaysia, for its part, has sup­ported the in­dus­tries that har­vest, pro­duce and ex­port its nat­u­ral re­sources, in­clud­ing palm oil and rub­ber, while also ven­tur­ing into the elec­tron­ics mar­ket.

In all of the coun­tries that have suc­cess­fully di­ver­si­fied their economies, the state played a lead­ing role, by pro­mot­ing in­no­va­tion and in­te­grat­ing the public and pri­vate sec­tors in or­der to sup­port ex­port-driven com­pa­nies and hu­man cap­i­tal de­vel­op­ment.

Oil-ex­port­ing coun­tries’ govern­ments should take the lead, too, and cre­ate in­cen­tives for in­di­vid­u­als to de­velop skills needed in the pri­vate sec­tor, par­tic­u­larly in high-value-added ex­port in­dus­tries. They should im­prove gov­er­nance, trans­parency, com­pe­ti­tion and, es­pe­cially, ed­u­ca­tion, by im­ple­ment­ing so­cial de­vel­op­ment pro­grams, and by keep­ing public-sec­tor wages and em­ploy­ment in check, to avoid crowd­ing out pri­vate com­pa­nies from the la­bor mar­ket. And, of course, they should al­ways take th­ese steps with an eye to macroe­co­nomic and fi­nan­cial sta­bil­ity.

The prospect of per­sis­tently low oil prices should be a wakeup call for oil-ex­port­ing coun­tries. Their govern­ments must put eco­nomic di­ver­si­fi­ca­tion at the top of their pol­icy agen­das. Some coun­tries al­ready have: Saudi Ara­bia re­cently re­leased its Vi­sion 2030 plan, which es­tab­lishes a blue­print for trans­form­ing the econ­omy, by re­duc­ing its de­pen­dence on oil, in­creas­ing the role of the pri­vate sec­tor, and cre­at­ing more jobs for Saudi na­tion­als.

Vi­sion 2030 is a good first step, but trans­lat­ing th­ese goals into re­al­ity will re­quire care­fully pri­or­i­tized and se­quenced poli­cies and govern­ment in­ter­ven­tions in the com­ing months and years. This is true not only for Saudi Ara­bia, but for all oil-ex­port­ing coun­tries — and a new year is as good a time as any to break the spell that oil has long held over their economies.

The au­thor, a for­mer deputy man­ag­ing di­rec­tor of the In­ter­na­tional Mone­tary Fund, is vice­gov­er­nor of the Peo­ple’s Bank of China. Project Syn­di­cate

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