Economic diversification is high on the policy agenda of the GCC countries as evident by the billions of dollars earmarked for that goal.
Like elsewhere, the urge for economic diversification in the GCC is driven by the desire to lessen economic dependency on any particular industry, especially the oil and gas industry.
In fact, this concern is widely shared especially among small countries that are very cautious not to fall prey to the “banana republic” syndrome — i.e. countries that are overly dependent on the export of a single product- or to be tormented by the booms and bust of natural resources revenues.
Nonetheless, economic diversification is an undertaking that is both costly and risky.
The stories about the failure of massive projects aimed at the creation of new industries in specific regions and in targeted fields are abundant.
In fact it is the frequent failure of such projects — for example in Latin America, India and Turkey- that have led much of the world to lose interest in ‘industrial policy’ as an instrument of economic development.
Successful economic diversification experiences can be broadly classified into two groups. Firstly, there is the group of countries that have successfully diversified their economies by playing homes for ‘footloose’ manufacturing and outsourced services.
These are countries like China, India, Indonesia, Mexico and Vietnam among others.
The second group is countries that have managed to successfully diversify by upgrading their existing industries introducing new products and services into new markets and hence diversifying their economies within their comparative advantages.
This would be countries like Brazil, Chile, and Malaysia.
The latter group adopted a less risky approach to diversification by considering the relatedness of existing infrastructure and natural advantages to new economic activities.
This approach can be very interesting to the GCC countries.
Taking existing industries that had gained momentum as a starting point help narrow the trial and error range and reduce the cost of failure by creating synergies with existing infrastructure and available resources.
Such approach has helped make Brazil, for example, one of the world’s largest producers of ethanol, which was based on their pre-existing sugar industry.
The Brazilian ethanol experience is indeed a very interesting one.
Due to Brazil’s suitable climate for growing sugar cane, the country has been the leader in sugar production several times in history.
Brazil’s efforts to use ethanol as a fuel started in the late 1920s, where it was experimented with as a component to be mixed with gasoline and was eventually adopted as a complete fuel substitute in the 1970s.
Brazil’s choice to start a new industry based on a pre-existing industry not only utilized the existing infrastructure and supply chain of the sugar industry but also diversified the products produced from the sugar cane crop. Brazil’s government experimentation with ethanol and eventual adoption of a main source of energy has incentivized companies such as Volkswagens, and later other companies, to innovate in creating ethanol powered engines.
The Brazilian case shows that it might be more effective to choose new industries for which a country has natural advantages like environment or location.
Another successful case of economic diversification within existing industrial structures is the Chilean salmon industry.
Chile is currently the second largest producer of salmon despite the fact that salmon is not a local fish.
This goes back to its existing legacy as a fishing nation owed to the country’s long coast.
However, the traditional Chilean fish industry was aimed merely at local consumption.
The industry had small space for mass production let alone export. In that time, the government had started an initiative to diversify the economy by creating organizations to identify the country’s potentials and leverage them for economic benefit.
One of these organizations is “Fundación Chile”, which identified the advantage of the Chilean cold water and long coast by introducing salmon fish.
The species was already produced for export in many countries such as Norway and Finland.
Soon, Chile became one of the largest salmon producers in the world.
In the mid 2000s an epidemic hit the salmon fish all over the world including Chile.
Because of the relatedness of salmon industry to the old fishing practices, traditional fish species created an emergency economic alternative when the virus effected the salmon production.
This shows the benefit of a having a related industry can be beneficial in times of fluctuation in demand or supply of the industries in the same field.
A similar story of diversification based on existing industrial structures can be found on the other side of the world in Malaysia.
The country’s climate and abundance of water resources has enabled it to become a major producer of rubber.
However, the fall in rubber prices has urged the country to diversify its agricultural production.
Consequently, an Agricultural Diversification Program was introduced by the Malaysian government in the 1960s in order to reduce the country’s economic over-reliance on rubber and tin.
This resulted in the introduction of oil palm, which was based on the country’s pre-existing experience from the long history of growing rubber trees.
In a short time the palm oil became a major product in the Malaysian economy.
The industry has grown to cover wide areas in Malaysia eventually expanding to Indonesia to maintain the burgeoning industry.
Malaysia is now a world leader in the use of palm oil in a wide range of industries including biofuel and pharmaceutical glycerin.
These three examples show that diversifying an economy can happen within existing industrial structures.
This approach can be a risk minimizer as it pursues new economic activities within existing industrial eco-systems.
Furthermore, new industries are born with the immediate advantage of being able to tap into existing pool of resources, supply chains and infrastructure.
In the GCC, the long history with the energy sector as well as the construction sector provides a basis for many new industries.
Most prominently, given the region’s development in green technology research, green construction seems to be a smart direction.
The region has a clear demand for reduction of energy use in buildings, especially that the high temperature season can last for many months.
The region’s rapid urban expansion could provide a high demand for green construction research, which could accelerate the development of green building technologies.
The GCC region has already taken some steps toward that end such as “Estidama” (Arabic for sustainability) rating system in Abu Dhabi and QSAS sustainability rating system in Qatar.
Nevertheless, there is a need for further advocacy of the green construction industry by the public sector. Hence, introducing supportive policies and creating effective facilitating bodies can be fundamental in providing momentum to the green construction industry, making the GCC region the pioneer in future buildings field.
— Dr. Sami Mahroum is director, INSEAD Innovation and Policy Initiative, INSEAD Abu Dhabi
Mohamad Fakhreddin is research fellow, INSEAD Innovation & Policy Initiative, INSEAD Abu Dhabi
