By Bahjat El-Darwiche, Dr. Raed Kombargi, and Stephen Anderson
Before the COVID-19 pandemic, GCC countries had initiated significant reforms that allowed them to respond to the pandemic in a more resilient, dynamic, and digital manner. Despite their preparedness, the pandemic has accelerated and amplified the GCC’s social, economic and urbanization challenges. The region’s governments have an opportunity today to revert back to their aspirational national visions and goals, and reinvent themselves for good.
To ensure prosperous and evidence-based reforms, GCC governments should understand and resolve five wide-ranging and interconnected tensions:
First, the pandemic highlighted the region’s socio-economic asymmetries. The dual shock of the pandemic and low oil prices meant a likely regional real GDP drop of 5.7% and aggregate fiscal deficits of 9.2%. The pandemic disproportionally affected small and medium-sized enterprises, which lack the capital or the diversified offerings and markets that protect large enterprises. The region’s high urbanization level, exceeding 82%, exposes its cities to hazards, and pressure on their infrastructures and resources.
Second, the pandemic reinforced the region’s need for emerging technologies such as artificial intelligence, blockchain, robotics, 3D printing, genetic engineering, and energy innovation. It also highlighted the obstacles to speedy adoption, including limited access to the talent and financing necessary for digital transformation. Meanwhile, the pandemic accelerated the growth of the global tech giants in the region, which raises the possibility that they will dominate various value chains, economic sectors, and markets.
Third, demographic pressures are intensifying. GCC countries with younger populations grapple with high unemployment rates. The unemployment rate for GCC youths between 15 and 24 years old is an estimated 12%, with female youth unemployment rates three times those of men of the same age. Countries with older populations are facing increasing and unsustainable pension and healthcare costs. The pension rates in the GCC are typically defined benefit plans that are financed on a pay-as-you-go model. They are more generous than most other countries, offering over 70 percent replacement rate compared to 59 percent in the OECD, which makes them financial unsustainable.
Fourth, there is greater international polarization. The lack of a coordinated international response to the pandemic indicates more stress on national sovereignty, which is likely to reshape the global order in ways that will affect the GCC. Already, the region’s trade is shifting to the east: China has become the GCC’s top trading partner, accounting for 15% of imports. A shift from global to regional and local economic activity is under way. The GCC, already struggling to attract foreign direct investment, is expected to have recorded a decline of $3 billion of such inflows for 2020.
Fifth, the pandemic was a test of trust in government, an unprecedented challenge to public service resilience and agility. GCC governments worked hard in response to the pandemic and economic disruption. However, in the years ahead, institutional trust will continue to be tested, including by societal trends, technological disruption, the increasing threat of climate change, and unforeseen crises.
To manage these five tensions successfully, GCC governments need to envision and pursue an aspirational future and bring it to life in a holistic and integrated way. Such a vision needs a handful of priorities: economic growth models that put local economies first, holistic people-centric approaches to well-being that put citizens first, and institutions that put innovation first.
In terms of growth models, GCC governments can create sustainable economic growth by adopting diversification agendas that boost the region’s competitiveness, productivity, and market and product sophistication. To do this, they can shift development efforts to innovative sectors that feature high economic multipliers, capitalize on their existing competitive advantages (e.g. abundant renewables), invest in research and development and become a platform for testing the latest innovations, and build domestic chains in critical sectors such as agritech and pharmaceuticals.
In terms of citizen-centric approaches, GCC governments can redesign existing social contracts to create more sustainable, inclusive, and empowering safety nets for their citizens, and enhance their quality of life. They can focus on raising the productivity of the region’s people and building labor markets that provide flexibility, security, and attractive private-sector opportunities.
In terms of institutions, GCC governments can accelerate their efforts to foster innovation. They can utilize digital technologies to provide personalized services, nurture citizen engagement, bolster confidence in the fiscal resilience of their governments, and adopt integrated sustainability agendas.
The COVID-19 pandemic has not fundamentally altered the challenges facing GGC countries, but has made mastering these problems urgent. Now is the time for a comprehensive understanding of the region’s tensions, and to craft and pursue cohesive policies and reforms capable of resolving them. The region’s future depends on the steps governments take today.
This article originally appeared in Gulf Business, May 2021.