Diversification of Middle Eastern economies requires innovative leadership

Celine Chami
Dec 07, 2021

This article is available in Arabic.

Diversification for sustainability

The Middle East is arguably the region that’s most concerned recently with shifting its economy from being oil-based, to a more diversified economy. With the price volatility of fossil-fuel, the slow, but steady shift to clean energy and the technological advancements that are shaping the modern world, oil-based economies in the Middle East are leading the reforms on model diversification into knowledge, services and technology centres.

As Michael Bradshaw, Professor of Global Energy at Warwick Business School puts it: “There is nothing new about the need for the oil exporting economies of the Middle East to diversify their economies away from an over-reliance on the production and export of hydrocarbons. Well before the climate crisis, notions of the resource curse and the challenges of price volatility suggested a need for economic diversification and some progress has been made in terms of the development of the services economies and the development of transportation and tourism. The oil price war and the initial phase of the pandemic in early 2020 presented a new type of fiscal shock, but in 2021 the oil price has rebounded, and revenue is once again flowing. However, this should be recognised as a false dawn, and it does not mean that things will revert to business as usual and demand and income will continue to grow.

Despite the limitations of the recent Glasgow Climate Change Pact, it is now understood by many oil exporting states that climate change action presents an existential risk to future oil demand and the availability of oil rents. While the rate of decline is uncertain and oil income may still be there for the next decade, these states must now prepare for age beyond oil. First and foremost, this means developing more diversified economies that can generate new sources of employment and revenue. Failure to do so will ultimately result in economic hardship and political instability. That is why now is the right time to embrace decarbonisation as an opportunity to deliver economic diversification and a more sustainable future.”

For Saudi Arabia, the shift has been mostly focused on science and technology, as the country aims to become a leading knowledge-based centre, regionally and internationally. This means that people, policies, partnerships and the supporting infrastructure will set the foundation for growth. This, in return, will require a higher involvement from the population, and a greater effectiveness of its educational system, as well as its public institutions.

The United Arab Emirates have initially attracted international businesses by setting up an attractive financial and technological infrastructure, and have been steadily growing into becoming a technological and innovation hub. With Expo 2020, set to be the largest event in the region, the UAE has clearly established its mark as a leader in quantum computing, artificial intelligence, air travel and technology-based healthcare. According to a report by Reuters, the expo has brought a fast upsurge in growth across the non-oil private sector.

Oman’s focus has been on trade and industry, as its Logistics Strategy lays out long-term objectives for increasing the contribution of the logistics sector to GDP. According to the International Trade Administration, Oman aspires to leverage its deep-water ports on the Gulf of Oman and the Indian Ocean to become one of the world’s top ten logistics hubs by 2040.

Kuwait has been focusing on fiscal and structural reforms. According to The World Bank, Capital market reforms and the inclusion of Kuwait equities in FTSE Russell and MSCI EM have led the country to outperform its GCC peers.

Qatar’s shift has been towards a service-based model, as the services sector, with its various administrative, commercial, economic, financial, and social components, is one of the most important sectors of the Qatar economy (Planning and Statistics Authority).

Encouraging an entrepreneurial mindset

Laura Trendall-Morrison, founder of GameChanger Consultancy states that “travel is one of the big bets for the region, with strategic decisions to invest in promoting this and developing travel hubs, as well as showcase events such as Expo 2020 and the upcoming World Cup in Qatar.

Despite the pandemic, domestic tourism grew at 38.6% and overall, 27.1% in 2021 to-date, despite changes and restrictions still in place at times, according to figures from the World Travel and Tourism Council (WTTC). Pre-pandemic, travel and tourism accounted for 270bn contribution to the Middle East economy. Many countries in region have areas of natural and historical interest, and the sector is seen as a key area for growth. There are also signs of growth with SMEs in food, leisure, hospitality, and fashion. This is supported by relaxation on visa rules to attract entrepreneurs, investors and creatives and heavy advertising of the tax benefits and opportunities, particularly in the UAE, and investment in SME start-up programmes. There is opportunity for further development and support of high-growth SMEs which could be supported by HNW individuals, Sovereign Wealth Funds or VCs.” (read Laura’s full opinion piece on Embracing change at the core of the new Middle Eastern economies here).

Leading with a culture of innovation

Professor Mohammad S. Khorsheed, Secretary General of the Steering Committee for Saudi Innovation Ecosystem, wrote back in 2015  “It is important for a culture to encourage risk-taking, value creativity and reward entrepreneurship. This is facilitated by an environment in which people who demonstrate such characteristics are able to connect readily with each other and to the resources they need to move forward with their ideas. This requires collaboration and linkages among public institutions, universities and private enterprises and deep knowledge of customers’ behaviour in order to be responsive to market signals and drive market trends.”

This is truer now than ever as an economic shift cannot work without the social and leadership reforms that are set to accompany it.

Dr Ray O. Johnson, Chief Executive Officer of the Technology Innovation Institute (TII), states that “as the world evolves fast, it is facing more global challenges than ever before, from climate change to cybersecurity to social inequality and financial crises. The COVID-19 crisis has only served to highlight the vital role of science and technology in shaping an empowered society. As part of a meticulous roadmap, TII is spearheading projects focused on innovative technology, harnessing big data, developing robust digital security infrastructure, and deploying autonomous capabilities. The breakthrough technologies and solutions under development at TII are not randomly selected, they have practical use-cases and span diverse sectors. For example, quantum and cryptography are crucial for protecting critical infrastructure while directed energy research has use-cases in healthcare. We encourage start-ups and technology stakeholders to come forward with interesting ideas that we can work on developing together for the greater good. ASPIRE, ATRC’s technology programme management pillar, is working in tandem to identify the most pressing issues confronting the human race today and to support grand challenges and competitions to find viable solutions to these challenges.”

Ramy Lahoud, Head of Strategy at Accord Business Group, states that “The availability of data, combined with development of technological tools to process it and embed complex data models, have enabled researchers for once, not only to be able to execute on those models, but to visualize their impact on graphs, digital models and beyond. Data and AI are at the forefront of the shifting mindset, whereas decision makers have the capability to tap into a wealth of data sources, that can lead the way for researchers to present accurate forecasting models, and what if scenario projections, enabling a data-based decision making approach.

With every change comes challenges, and staffing, resources and skills have been at the forefront of it. Governments have put in place upskilling programs and invested in driving demand from youth towards education and specialization, combining forces with the private sector, as well as with technological vendors in the region willing to build bridges and long term relationships.”

Ramy adds that “leaders will need to embrace the change and lead by example, while understanding the different forces and traction within the market they cover, so that they mould their organization whilst embedding the new regulations. Nationalization brings in the challenge to integrate cultures in the companies, as well as to set the right metrics to manage resources, motivate them and retain them.

The approach to all of these changes should be rather flexible, and based on experimentations as opposed to coming with a fixed intangible model. Openness to feedback and adjustments will be needed along the way and there will always be a margin of error to account for, as long as the lessons are quickly learned and proper counter measures are set in place.”

Whilst each country in the Middle East has its own vision and roadmap, dealing with global and regional trends and challenges remains a common ground to all of them. With so many ventures to focus on, leaders must work on creating first and foremost a company culture that fosters innovation, creativity and resilience. They should equally think ahead in forming teams that are more agile, more flexible and that can easily adapt to constant change.

With diversification comes a culture of openness, collaboration and co-creation. And that’s how leaders must reposition their vision, for the benefit of their companies, their employees and their communities at large.

As Dr Johnson puts it: “This is a journey. We are only getting warmed up – and have many miles to go in making sure we don’t just boost the contribution of the advanced technology sector, but also enhance the country’s credentials as a leading advanced tech player globally.”

Celine Chami

Marketing and communications consultant

Celine is a brand expert and university lecturer with over 20 years of experience. As well as working and training hundreds of companies in the MEA region, she is currently pursuing her Ph.D. in Human Resources.