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Success of Economic Diversification Strategies Critical for Resource-Rich Economies

The success of economic diversification strategies is key to overcome resource dependence and safeguard long-term sustainable economic growth in resource-rich countries. Natural resources are finite and face huge fluctuations in prices, making economic diversification critical to decouple from volatile government revenues that are highly dependent on commodity exports. For several years, resource-rich countries like Peru, Chile, Russia, Australia, oil-dependent countries of the Gulf Cooperation Council (GCC) and others, rode on the success of their resource-based growth models in the atypical years of commodity market boom from 2000-2008. However, fluctuations in global prices and demand since then have presented several challenges making economic diversification a top economic agenda in these countries.

Dependence on Exports of Mineral Fuels and Total Exports in GCC countries: 2013

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)

Overcoming resource (and China) dependence is essential

After decades of rapid growth, the Chinese economy is slowing, which is having spillover effects on commodity exporters globally:

  • For example, in Q2 2014, real annual GDP growth in Peru – amongst the top metal producers globally according to the IMF – slumped to 1.7%, its lowest quarterly annual growth since the recession in 2009, thanks to falling copper prices and reduced demand from China that slowed export growth and private investment;
  • Australia – amongst the largest global producers of several minerals – is also dependent on China. In 2013, 59.5% of total exports came from exports of metalliferous ores and metal scrap and mineral fuels alone.

The lack of clear economic diversification strategies is making these economies vulnerable to commodity price fluctuations:

  • In the GCC, one of the biggest challenges is managing risks associated with high oil dependence and developing non-oil trading sectors. Diversifying will not only lead to sustained long-term growth, but also create more jobs for the bloc’s young and growing population and reduce the dependence on returns on sovereign wealth funds;
  • Russia’s economic growth model continues to be dependent on energy exports, leaving it vulnerable to external shocks with exports of mineral fuels accounting for nearly three-quarters of total exports in 2013.

Mixed progress on diversification

Oil dependence has also led to long-standing challenges of income inequality and poor job creation that caused widespread civil unrest as seen in the Arab Spring since early 2011. Progress on diversification has so far been mixed:

  • Following dismal results in the first two quarters of 2014, Peru’s government was forced to take measures to boost domestic demand and offset the dependence on mining exports while Australia still does not have a diversification policy in place;
  • The GCC have been targeting development of industries like infrastructure (Qatar, Saudi Arabia and Bahrain), promoting small and medium enterprises (SMEs) (Kuwait and Oman) and establishing strong educational and healthcare networks. While these have made huge strides in economic and social development, more efforts are needed to improve skill sets of the population as well as engaging domestic populations in the private sector;
  • In Saudi Arabia, the contribution of non-oil GDP is rising and grew by 5.3% in real terms compared to the negative 1.0% growth in real oil GDP according to the IMF in 2013. The government is making considerable efforts to lay the groundwork for further diversification by upgrading infrastructure, strengthening education and skills, boosting access to finance for SMEs, and improving the business environment.

Diversification to support future growth 

Diversification for resource-rich economies is inevitable to reduce risks associated with high dependence on commodity export-growth models and to limit the impact of fluctuations of commodity prices on domestic economies.

The UAE is the only country in the GCC that has successfully diversified away from energy with modern infrastructure that includes a seaport among the largest in the world, a number of world-class hotels and a business-friendly environment. Azerbaijan is another success story developing new sectors in its economy, fostering successful private sector-led growth and lowering its dependence on mineral fuel exports. Exports of mineral fuels made up 93.8% of Azerbaijan’s total exports in 2013 but the government announced in late 2014 it will completely eliminate its oil and gas dependence in the next five to seven years.

However, growth in the non-oil sector generally for GCC countries has remained weak. Investment in education to improve skill sets of domestic populations remains paramount and policy reforms to create non-oil growth and job opportunities will remain a big challenge. The rapid development of shale oil and gas production in the USA will impact global oil prices and demand, which will also play a key role to further push GCC diversification efforts.

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