Unleashing the power of productivity
The reality of slower gross domestic product growth in the Gulf over the past decade reflects the weaker momentum of traditional growth drivers. The oil-government nexus has been affected by the new realities of energy markets and government fiscal consolidation. The infrastructure boom of the early 21st century has lost momentum because of weaker multipliers and more subdued demand growth, market saturation in some segments, natural gas constraints, etc.
Accelerating growth from its current norm will require the activation of new drivers, one of which towers above all in terms of its potential: Productivity. Success in this regard is of considerable strategic importance as crosscountry differences in per capita income are primarily attributable to differences in labor productivity.
After decades of GDP growth driven almost exclusively by increases in capital and labor inputs, the room for improvement is considerable.
Labor productivity growth in the Gulf has been negative almost across the board, declining by an average of 2 percent a year from 2000 to 2018. This is, in no small measure, reflective of the traditional private sector predilection for low-productivity activities such as construction, trade, and restaurants. In fairness, a productivity slowdown is not just a Gulf Cooperation Council problem. Labor productivity growth globally halved from its 2007 peak of 2.8 percent to a low of
1.4 percent in 2016 and has remained below 2 percent since then.
To boost productivity, the Gulf economies need smarter capital allocation, better governance, and increased efficiency in resource use. These changes must be pursued on multiple levels.
First of all, more capital must be channeled into higher-productivity sectors and activities where it can be expected to generate greater value and sustainable employment. By contrast, the closed, non-tradable sector of the economy achieves its margins in large part through a heavy reliance on low-cost labor. This approach has tended to involve minimal innovation but has also held back investment in technology.
Regulatory reform, financial market development, and government support are needed to shift more capital into activities where productivity gains are more easily achievable, whether through technology, skills, or scalability, not least through exports. COVID-19 may have facilitated the change by pushing traditional businesses to pursue new ways of operating through digitalization.
But there is a growing consensus that change at the level of individual businesses is just as important for productivity. It is impossible to have a dynamic economy without dynamic businesses. After decades of relative stability thanks to robust population growth, increased government spending, and access to subsidized inputs and low-cost expatriate labor, the economic realities facing GCC businesses are changing.
Fiscal consolidation since 2015 has further accelerated the process while slower growth has made for a much more contested marketplace where companies are sacrificing margins through price competition. COVID-19 has amplified these trends by underscoring the importance of business model overhauls while also making technology-based alternatives to traditional business practices increasingly widely available and cost-effective. Such organizational and technological changes in businesses, along with changing consumer behavior, are serving to push up productivity in the Gulf ’s corporate sector.
Fixing the productivity problem is not a one-off change. Productivity is the result of corporate dynamism — a culture where businesses are forever looking for smarter ways of boosting their bottom line. Globally, such dynamism is primarily driven by competition that effectively penalizes complacency. To this end, it is imperative to continue with the region-wide process of overhauling business regulations.
The processes for setting up, consolidating, and winding down companies must be simple, fast, and cost-effective, not least because a shake-up of established business practices will inevitably deliver winners and losers.
Business competition and consumer rights must enjoy the explicit support and backing of the government through dedicated, appropriately empowered resources. But a more level playing field must also be matched by a financial sector that provides all companies access to capital on reasonable terms, an area where there is still much room for improvement. And businesses must have access to — and show a commitment to — human capital. The pay-offs for progress are substantial, with the International Monetary Fund recently estimating that matching international standards in these three areas could raise potential GDP growth by 1.5 percentage points.