Gulf Region

July 2020

Special Edition: Coronavirus6 min The Gulf Post Covid-19: How Can States Step Up Economic Innovation?

Image of the Sagadril-1 Oil rig, Corniche Abu Dhabi
Sagadril-1 Oil rig, Corniche Abu Dhabi ©Guilhem Vellut, CC BY 2.0 via

In recent years, the Gulf States have all put forward ambitious reform plans that aim to catapult their economies into the future. Given an almost complete dependence on the revenues of their oil reserves, economic diversification and investment in local talent have been matters of emergency. The coronavirus crisis, which aggravates most of their problems, is an opportunity to take stock of their progress.

Not just since the outbreak of the coronavirus pandemic, governments around the world have been eager to promote innovation in an effort to boost economic growth and provide solutions for today’s unique challenges. Lagging behind, despite their wealth, are the states of the Gulf Cooperation Council (GCC). They rely heavily on the exploitation and export of their natural resources, the import of products, services, and knowledge, and on foreign labour. As so-called “rentier states” they have not needed to increase domestic innovation and productivity. But with traditional sources of revenue depleting, Gulf States will have to change course dramatically in order to thrive. The corona crisis is a harsh reminder of this reality.
The pandemic has exacerbated the Gulf’s socioeconomic problems, most notably by causing a collapse of oil prices, which have halved to just 30 USD per barrel since January. With businesses and economies worldwide crippled, many migrant workers employed across the Gulf, such as in hospitality, have lost their jobs and are now stranded. In fact, the pandemic has forced the GCC to close its borders to labour and tourism alike and is expected to make an impact for at least 18 more months. For a region plagued by lack of innovation and accountability, bureaucracy, and arbitrary decision-making, it would be devastating not to seize the moment and push hard for economic reforms and diversification so urgently needed.

While all Gulf countries have impressive plans to this end, their successes will be measured in terms of actual implementation of projects and creation of infrastructure. Let’s have a look at how far the countries have come in recent years.

Research and Development

The GCC countries are trailing behind many other parts of the world when it comes to investments in, and promotion of, research and development (R&D), often opting to import experts and technology rather than to invest in home-grown talent. Problems start with the very framework for such activities, as there is a lack of legal protection of intellectual property. However, a current report shows that a one-percent increase in R&D could boost economic growth by 0.6 to 2.2 percent in the GCC.
The United Arab Emirates (UAE) and Qatar, two political rivals, have the edge over their regional neighbours. Their “entrepreneurship ecosystems” – a “mix of attitudes, resources, and infrastructure” – rank higher in the Global Entrepreneurship Index of the World Economic Forum.
The UAE, for example, has been investing in artificial intelligence and space exploration technology, while consistently encouraging innovation and entrepreneurship among both citizens and residents. One of its flagship programmes is the Hope Mars Mission. The UAE is also home to the first nuclear plant in the Arab World.
Kuwait and Bahrain, which have a large youth population, have attempted to foster local innovation. However, the budget for R&D in these countries remains low. With the loss in oil revenues, and a somewhat politically active society, these two countries are enlisting the help of the private sector to capitalise on young local talent to drive economic growth. With its Vision 2030 reform plan, “Tamkeen,” Bahrain introduced a tax on businesses based on the number of migrant workers they employ, rewarding those with higher percentages of national employees. Until now, it is difficult to assess how successful this programme has been. As for Kuwait, the country lacks a centralised data system to highlight its innovation and progress, or lack thereof.
Oman, which has been struggling to keep its budget in check and lower its debts, lags behind the UAE, Qatar, Bahrain, and Kuwait on innovation and entrepreneurial infrastructure. However, the country has opened its doors to China, which recently acquired 49 % of Oman’s public electricity company. Unlike other GCC countries, Oman’s agricultural opportunities can ensure a higher level of food security. Its youth currently represent around half of the population, giving the country a strong base for creativity and innovation. However, the Sultanate has so far opted for more traditional economic stimuli to provide more public sector jobs and limit foreign labour. It is also yet to exploit its great opportunities for eco-tourism.

The Biggest, Not the Best

The Kingdom of Saudi Arabia only began to implement economic and social reforms in 2015, which some say was too little, too late. For one, the Kingdom has focused heavily on promoting entertainment, tourism, and travel, a model that has proved successful for the UAE. It has ignored other projects that could help Saudi Arabia to live up to its role as self-proclaimed leader in the Arab World. These include investments in solar energy or agricultural development to boost energy efficiency and lower spending on food imports, respectively – two major problem areas for the Kingdom and the GCC as a whole. But such solution-oriented initiatives are only possible, if R&D becomes a central part of not just the Saudi but the GCC public agendas.
However, Saudi Arabia, the Middle East’s largest economy, has taken few serious steps in this direction, and it seems that the political will to enact deeper structural reforms does not yet exist. Alongside tourism and entertainment, the Kingdom’s focus has been on the stock market launch of Saudi Aramco, its public oil company, in hope of funding Neom, a 500-billion-dollar cross-border smart city along the Red Sea. Challenges, however, surface time and again, the newest being the backlash from a Saudi tribal community that has lived on the land for decades.

All in all, the Kingdom’s path towards the goals of its Vision 2030 reform plan, once touted as unstoppable, has been a bumpy one. The Government only recently announced cuts to allocations to this plan by 100 billion riyals, while other spending is on hold as well. Many decisions taken to boost its economy have been controversial, such as to triple VAT from 5 to 15 percent.

GCC Standing in Its Own Way

Aside from the impact of the coronavirus and low oil prices, one of the biggest blows to the GCC economies has been the devastating Saudi-led war in Yemen. But regional tensions, above all with Qatar, further destabilise the situation and make the GCC vulnerable to economic and security challenges.

Since 2017, Qatar has been in a diplomatic row with Saudi Arabia, joined by the UAE, Bahrain, and several other governments outside the Gulf region. The rivals have not yet found common ground. Doha has instead chosen to politically and economically align its interests with Saudi Arabia’s rivals, Turkey and Iran, in order to strengthen its regional influence.

Qatar has previously launched a series of initiatives under its flagship Qatar Business Incubation Center (QBIC) to support small and medium enterprises and entrepreneurship. It has also launched Silatech, an initiative supporting young talent in several Arab countries. However, since 2017, it is difficult to assess the extent to which Silatech has contributed to a healthy entrepreneurial ecosystem in MENA. Despite the political rift and continuing wariness from both sides, the GCC bloc is regularly coordinating with the Qatari delegation.
The GCC member states all share similar problems to which, ultimately, technology and innovation are the answer: water scarcity, food insecurity, dependence on import of just about anything, dwindling oil prices and reserves, high energy consumption, and so many more. While acting in unison on these issues seems wise, it is to be feared that the future will see the countries compete aggressively to attract investments, foster domestic talent, and ensure the survival of their economies and political systems. Looking at their progress on the path of innovation so far, it remains to be seen who will lead their fragile union into the future.

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