Good reads for National Day

ECONOMIC DIVERSIFICATION GOES HAND IN HAND WITH A BUNCH OF OTHER FACTORS

Part 2 of our three-part special series. Read all about this Winning Nation that has grown in such a short span of time to become a force for change in a region roiled by many conflicts

Nations that rely heavily on a single natural resource such as hydrocarbons, need to diversify their economies if they want to achieve sustainable long-term growth. It should be said at the outset that economic diversification in countries that are used to earning revenues effortlessly presents a unique set of difficult challenges. Should a nation fall back on traditional sectors for growth that have worked well elsewhere but have a limited life expectancy in today’s fast-changing world? Or should it take a punt and focus on new and exciting areas of growth that are yet untested? There are almost no instances in recent history of resource-dependent countries successfully broadening their economic base. Some are in the process of doing so belatedly and this makes it truly unexplored virgin territory.

No other nation has embraced diversification in such a dramatic, organised and visionary way as the UAE, with the country today looking very different from that in the 19712000 period. Its focus on creating a knowledge-based economy harnesses innovation, education, learning and human capital-deepening, all of which bode well for the future. It is attempting to steer its own citizens away from traditional public-sector jobs into the private sector and entrepreneurship, while continuing to attract top foreign talent in fields as distinct as design and artificial intelligence.

The main driver of diversification in the UAE has undoubtedly been Dubai. With little in the way of natural resources, Dubai has had a long history of diversification and its customary proactive stance and openness have served it well in recent years. After putting in place the necessary basic infrastructure, Dubai continued with its policy of governmentinitiated development with private sector backing. A flexible labour force — both skilled and unskilled — and fast-track decision-making at all levels meant Dubai could leapfrog mainstream manufacturing and head straight into the higher margin services sector. And along the way, it has built some significant brand equity for itself as well. Today, Dubai’s rapid diversification into retail (27% GDP), transport (15%), real estate (14%), manufacturing (13%), banking and finance (13%) and construction (9%), with tourism and logistics not far behind, means that the emirate is now better prepared to withstand volatility in one sector — real estate for example — because the other sectors will be robust enough to pull the economy through the worst of times.

And shocks will happen. One benefit of economic diversification away from a single natural resource is the ability of the economy to take it on the chin when it comes to economic tremors. These days, the dismal record of economists in predicting where and when the next big disruption will occur and possibly plunge the world into another recession is only beaten by seismologists’ helplessness in forecasting where the next big quake will hit.

In the case of the UAE, the oil and gas sector still contributes some 33 per cent of GDP and this share is unlikely to decrease in the immediate future. This is not necessarily a bad thing if oil prices hold up, as it provides an economic cushion against possible hard landings in the future. Most tellingly, recent IMF figures show that oil and gas as a percentage of total exports was less than 30 per cent for the UAE as compared to more than 90 per cent for Iraq, 85 per cent in Kuwait, 75 per cent for Saudi Arabia and 60 per cent for Oman. Even Norway, a non-OPEC oil and gas exporter, is struggling to diversify its economy in which the hydrocarbon sector still makes up 25 per cent of GDP.

Diversification goes hand in hand with factors like the ease of doing business, the ability to attract capital — both domestic and foreign, and embracing and commercialising new technologies. The UAE continues to climb the world rankings on ease of doing business (21st) and global competitiveness (17th), figures that are impressive indeed. However, further diversification is necessary into emerging sectors and away from the old economy into the new. Following Dubai’s lead, further liberalisation of the financial sector would help position the UAE as a world-class hub along the lines of Hong Kong or Singapore. Another area that could be a major driver is education. Indian families send thousands of students to the US and other western countries for higher education each year at a great cost. There is no reason why an international, world-class, cost-effective education in nearby UAE could not attract these and other students.

As the UAE turns 46, what are the areas that can deliver sustained economic growth? A lot has been said about SMEs and their role in shaping the economy of the future, especially given their contribution to national output. The majority of SMEs still operate in traditional sectors of the economy but they are the bedrock of business in the country. New startups have begun burgeoning with the help of the many incubators that have been established, mainly in Dubai, and these are building an ecosystem for innovation in the country. Both types of SMEs obviously need to be encouraged but the main stumbling block continues to be a paucity of bank finance for established SMEs and the lack of a funding environment for startups. Technology is moving at lightning speed and blockchain, AI, 3D printing and advances in Fintech all sound exciting. Speak to any startup and they will tell you that their biggest challenge is customer acquisition. The UAE, with its ability to attract MNCs and with its forwardthinking government entities provides a fertile and natural validation ecosystem for early stage businesses. For it is when ideas mate with technology and produce business winners that funding begins to take shape. This is what happened in Silicon Valley.

Having taken the bold step towards an economically diversified future, the UAE should unhesitatingly continue down this path. Lessons to be learnt: there is no looking back, unlike Indonesia for example, which attempted diversification in the post-Suharto era but then fell back once again on natural resources. Missed opportunities rarely return and with Dubai leading from the front, the UAE’s continued economic diversification should make the 46th year of the Union the pivotal point of the UAE’s economic future.