A World Bank Group Publication for the Gulf Cooperation Council Economies Gulf Economic Monitor Building the foundations for economic sustainability Human capital and growth in the GCC Gulf Economic Monitor Building the foundations for economic sustainability Human capital and growth in the GCC Executive Summary The economies of the GCC recovered in 2018 despite signs of international reserves declined. Bahrain’s current account deficit weakness in the global economic outlook, reinforcing the per- widened due to higher remittance outflows. ception that GCC economies’ fortunes are still inextricably tied to oil. Global growth slowed in 2018, as trade tensions be- Narrower fiscal deficits allowed most GCC countries to keep tween the U.S. and China escalated, and goods trade slowed their end-2018 gross government debt stocks at close to their end- markedly. However, the steady increase in oil prices until Oc- 2017 levels, in percentage of GDP terms. Bahrain and Oman, tober 2018 lifted growth in the GCC economies, from an aver- with elevated debt levels, saw their economic situation somewhat age of -0.2 percent in 2017 to 2.0 percent in 2018. Two of the improve. Bahrain received commitments of $10 billion in finan- region’s largest economies Saudi Arabia and Kuwait, as well cial support from its GCC neighbors and announced a Fiscal Bal- as Oman, emerged from recession in 2018. Growth outturns ance Program that is designed to achieve a balanced budget by were driven by higher oil production in the second half of 2022. This reduced near term financing pressures and bond 2018, higher capital investment made possible due to the rise spreads declined. Nevertheless, both fiscal and current account in oil revenues, and higher domestic demand. deficits remained high, translating into higher indebtedness for Oman, and lower foreign exchange reserves for Bahrain. Fiscal and external balances improved, also tracking oil sector performance. GCC countries’ fiscal balances improved in Banks expanded credit to the private sector, even as the mone- 2018, aided by the average increase in oil prices and progress tary authorities raised policy rates in tandem with the Fed, keep- with non-oil revenue mobilization in some countries. This al- ing regional currencies pegged to the U.S. dollar. Inflation re- lowed most countries to reduce fiscal deficits while actually mained low, with headline rates rising only temporarily in Sau- increasing spending in some cases. Saudi Arabia, for example di Arabia and the UAE following the introduction of the VAT was able to halve its overall fiscal deficit in 2018 while simul- and in Bahrain due to higher food and transport costs. Given taneously increasing total spending by 10.8 percent. Other that the exchange rate peg [to the U.S. Dollar] has maintained countries also demonstrated procyclicality in fiscal policy, as monetary policy credibility, and the real effective exchange rate spending increased across the GCC. Saudi Arabia and the has remained relatively stable, the GCC must focus on reducing UAE implemented a 5 percent VAT in early 2018, and Bahrain unit labor costs by increasing productivity and containing high followed in early 2019. Oman introduced excise taxes on to- wages to enhance international competitiveness. bacco products, energy drinks and soft drinks in mid -2018 and increased corporate income tax. The global outlook continues to be uncertain and slowing growth in the advanced economies and China is likely to trans- Higher oil prices allowed most GCC countries to strengthen ex- late into downward pressure on the price of oil. Growth in the ternal accounts. Sizable surpluses in merchandise trade, buoyed GCC in 2019 is projected to match that in 2018, at 2.1 percent, by healthy oil export revenues, offset deficits in services trade before accelerating to 3.2 percent in 2020 and stabilizing at 2.7 and in the primary and secondary income accounts. Current ac- percent in 2021. Oil production curbs in the first half of 2019 count surpluses rose in Saudi Arabia, the UAE, Qatar, and Ku- will weigh down on growth in the year, while spending on wait with higher commodity prices. Qatar more than doubled its mega projects and new hydrocarbon ventures will lift growth in current account surplus due to higher gas prices and production. 2020-21. Fiscal deficits are projected to persist in 2019-21 in While Oman did manage to reduce its current account deficit, four of the six GCC countries, highlighting the need to resume fiscal prudence. While current account balances are projected to will play an important part in making this happen. Ambitious remain in surplus, mostly in the larger economies; a renewed infrastructure investment plans would also need accelerated focus on non-oil exports should strengthen external accounts foreign direct investment. As this edition of the Monitor high- going forward. lights, FDI inflows into the region have under -performed that of other emerging markets and developing countries. Non -oil One possible counterweight for this continued uncertainty could exports, including petrochemicals and aluminum, have be a focus on deepening structural reforms measures— institu- emerged, but from a very low base. Much has been done in tional and policy — to further economic diversification and recent years to attract FDI, especially in non -hydrocarbon sec- create employment for GCC nationals. GCC countries have tors, and to encourage non-oil exports, such as reforming legis- prioritized both these goals in their Vision documents and most lation and creating free trade zones with generous incentives are actively implementing Vision Plans that aim for ambitious for investors. A remaining agenda includes loosening foreign progress across a range of structural reforms. Some GCC coun- ownership of firms and reducing non-tariff barriers, in addition tries introduced significant reforms in 2018 with respect to non- to business environment reforms which are already receiving oil revenue mobilization, energy subsidies, competition policy, high priority in many countries. licensing, and procurement. Large spending plans and mega investments are also planned which can generate growth in the A major challenge facing the GCC countries is increasing pri- short term but need complementary structural reforms for vate-sector led job creation for nationals. Inadequate skills, con- achieving sustainable growth beyond the forecast period. straints to women’s participation in the labor force and a legacy social contract with public sector jobs with attractive pay and This edition of the Gulf Economic Monitor spotlights three long benefits have created an outcome where private sector jobs are -term challenges to be prioritized to achieve economic diversifi- largely held by expatriate workers even in a situation where un- cation: (i) fiscal consolidation; (ii) openness to trade and FDI; employment in GCC countries, particularly among the youth, is and (iii) labor market reforms to increase employment for GCC high. Almost all countries are pursuing a combination of reforms nationals. While governments are currently implementing these that include mandatory quotas for nationals in certain sectors, reforms, although at a varying pace, more focus on enforcement and penalties for employers who do not adhere to quotas. and implementation is needed to meet countries’ aspirations to create more resilient and equitable growth. Finally, in the In -Focus section the Monitor turns to a critical topic—human capital formation in the GCC, which has im- In the area of fiscal management, while good progress was made plications not only for human development and unemploy- on rolling out the VAT in three GCC countries, others postponed ment but for the long-term sustainability of a diversified eco- its adoption, delaying prospects to broaden the revenue base in nomic growth model that is knowledge -based and private- those countries. In Saudi Arabia, introduction of the VAT and sector driven. As part of the World Bank ’s ‘Human Capital excise taxes provided a significant boost to non-oil revenues. Project’ this section discusses the elements of the ‘Human Similar revenues gains were seen in the UAE. Structural reforms Capital Index’ and its scores across the GCC, which rank that target improving the business environment and increasing lower than countries with comparable levels of income. Re- dynamism in the private sector are expected to broaden the tax sults indicate that the most pressing challenges slowing hu- base and help reduce dependence on hydrocarbon related reve- man capital formation in the GCC relate to learning outcomes nues. In this context, Oman’s harmonized tax system, with cor- and adult survival rates. These are exacerbated by challenges porate tax rates that apply equally to foreign and domestic na- brought about by a segmented labor market. To accelerate tionals, levels the playing field and helps encourage foreign in- human capital formation, countries must take a ‘whole of vestment. Finally, reforms to increase expenditure efficiency and government ’ approach to ensure policy coordination and ef- reduce subsidies already well underway in some GCC countries, fective strategy implementation. Strategies to improve skills need to be deepened and advanced. and learning and health outcomes must come in tandem with strategies aimed at increasing female labor force participa- Economic diversification has long been a priority in many tion, removing labor market distortions and creating a dy- GCC countries, and foreign investment and non -oil exports namic private sector. The Pulse of the Region Recent developments picked up in most countries, although from a small base. Simi- larly, higher oil prices strengthened fiscal and external balances Weakening global growth, notably in the second half 2018 creat- and allowed some countries to increase spending while still ed a difficult economic environment for many commodity ex- achieving fiscal consolidation. porters including the oil-exporting GCC countries. Global growth decelerated slightly in the advanced economies and more mark- Higher oil prices in early 2018 and robust non- edly among emerging market and developing economies in 2018 oil activity lifted growth in the GCC (Box 1). Goods trade slowed, weighed down by increased trade tensions and tariff hikes between the United States and China. Economic growth in the GCC region recovered to 2.0 percent Borrowing costs rose with tighter financial conditions in vulnera- in 2018 from -0.2 percent in 2017 (Figure 1), still down from ble countries and divergent monetary policy among the major pre-2014 performance. On average, oil prices were 30 per- economies. Oil prices fluctuated markedly rising steadily through cent higher in 2018 than in 2017, and oil production was 3.5 October 2018 before falling sharply toward the end of the year. percent higher, supporting growth in oil -related GDP. (Figure2). Production trends diverged during the year, how- Global manufacturing and trade continued to exhibit signs of ever. OPEC had initially agreed to maintain production curbs weakness in early 2019, though prospects emerged for a re- in 2018 in line with a December 2016 agreement. However, duction in trade tensions. Markets became more optimistic joint action between oil producers to increase production dur- about a U.S.-China trade deal. Financial conditions eased as ing the year to compensate for production outages in Vene- the U.S. Federal Reserve signaled a more accommodative zuela, Libya and Angola and the prospect of U.S. sanctions monetary policy stance. Global services activity remained on Iran resulted in an oversupply towards the end of 2018. resilient. Meanwhile, since the beginning of 2019, oil prices This also pushed oil prices down by 42 percent between Oc- have recovered somewhat following production cuts by oil - tober and December 2018. Non -hydrocarbon growth acceler- exporting countries. ated in all GCC countries, supported by rising domestic de- mand and higher capital investment. Macroeconomic outcomes in GCC countries were supported by strong oil prices in 2018. Economic growth, fiscal accounts, and Higher oil receipts were a key factor behind the 2018 growth external balances in the GCC were all strengthened by the strong recovery in Saudi Arabia. Saudi Arabia increased oil production rally in oil prices between January and October 2018. The sharp in the second half of 2018, taking its average output to 10.33 reversal in oil price trends between October and December, million barrels a day (mmbd) in 2018 from 9.96 mmbd in however, may have begun to dent the growth momentum in late 2017. This helped support GDP growth of 2.2 percent in 2018 2018, according to fourth quarter data. Non-oil growth also compared to -0.7 percent in 2017. The oil sector contributed Global Developments 1/ Accounts of global developments are drawn from World Bank, Global Eco- nomic Prospects – Darkening Skies, January 2019, and World Bank, “Global Monthly”, January 2019, February 2019, and March 2019. 2/ About a third of European and more than half of German exports to devel- oping Asia are machinery and vehicles while a third of developing Asia ex- ports to Europe are electronics and capital goods. Global GDP growth Global trade and industrial production growth Percent, year-on-year Percent, 3-month seasonally-adjusted annualized rate 6 15 6 5 10 5 4 4 5 3 3 0 2 2 -5 1 1 0 -10 0 May-2014 May-2015 May-2016 May-2017 May-2018 Sep-2014 Sep-2015 Sep-2016 Sep-2017 Sep-2018 Jan-2014 Jan-2015 Jan-2018 Jan-2016 Jan-2017 Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 World High-income countries Developing countries World trade volume (lhs) World industrial production (rhs) U.S. Federal Funds rate, 10-year Treasury bond yield, and Crude oil and natural gas prices, spot Federal Reserve balance sheet, Percent and U.S.$ trillion U.S.$ per barrel, and index 4.0 4.6 150 4.4 3.0 100 4.2 2.0 4.0 50 1.0 3.8 0.0 3.6 0 Oct-2014 Oct-2017 Oct-2018 Oct-2015 Oct-2016 Jan-2014 Jul-2014 Jul-2015 Jan-2016 Jan-2017 Jan-2018 Jul-2018 Jan-2015 Jul-2016 Jul-2017 Jan-2019 Apr-2014 Apr-2015 Apr-2016 Apr-2017 Apr-2018 Oct-2015 Oct-2018 Oct-2014 Oct-2016 Oct-2017 Jan-2014 Jan-2016 Jan-2017 Jan-2019 Jul-2014 Jan-2015 Jul-2015 Jul-2017 Jan-2018 Jul-2018 Jul-2016 Apr-2014 Apr-2015 Apr-2016 Apr-2017 Apr-2018 U.S. Federal Reserve assets (US$ trillion) (rhs) Crude oil, Brent, US$ per barrel (lhs) U.S. 10-year Treasury bond yield (ave.) (lhs) Crude oil, average of Brent, Dubai, and WTI, US$ per barrel (lhs) U.S. Federal Funds rate (effective) (lhs) Natural gas, index (2010=100) (rhs) roughly half of this growth outturn. Private and government non mmbd in 2017 to 3 mmbd in 2018. The oil sector contributed -oil activity accounted for the other half, with private consump- 1 percentage point to GDP growth of 1.6 percent in 2018. tion contributing 1 percentage point to growth and government The non-oil sector remained robust, contributing 0.6 percent- consumption 0.4 percentage point. age point to growth. Private consumption reversed a contrac- tion of 1.3 percent in 2017 and grew 2.5 percent in 2018. In the UAE, higher non-oil activity played an important part in Capital investment grew by 1 percent in the year, from 0.6 the growth recovery. The UAE raised oil production from 2.93 percent in 2017. GDP growth and oil and non-oil sector contribution Oil production and demand to growth, Percent and percentage points Million barrels per day 6 12 105 3 100 8 0 95 -3 4 90 -6 2014 2016 2014 2016 2014 2016 2014 2016 2016 2018 2016 2018 2018 2018 2018 2018 2014 2014 0 85 2014 2015 2016 2017 2018 Saudi Arabia UAE Qatar Kuwait Oman Bahrain Saudi Arabia UAE Non-oil contribution to growth, percentage points Kuwait Qatar Oil contribution to growth, percentage points Oman Bahrain GDP growth, percent Global supply (rhs) Global demand (rhs) Fiscal revenue, expenditure, and balance General government gross debt Percent of GDP Percent of GDP 60 100 40 80 20 0 60 -20 -40 40 -60 20 2014 2016 2018 2018 2014 2014 2016 2018 2018 2014 2014 2016 2016 2018 2014 2016 2016 2018 Saudi UAE Qatar Kuwait Oman Bahrain 0 Arabia 2014 2015 2016 2017 2018 Revenue Expenditure Fiscal balance Bahrain Qatar Oman Saudi Arabia Kuwait UAE Economic activity picked up in Qatar, reversing the slowdown government ’s deficit and debt problems. Government con- that resulted after a diplomatic rift with GCC neighbors. High- sumption also slowed from 3 percent in 2017 to 0.8 percent er gas output and strong performance in transportation, storage in 2018. Private consumption grew 1.6 percent in the year, services, and financial services boosted GDP growth to 2.1 supported by net exports, which contributed almost half to percent in 2018 from 1.6 percent in 2017. Since the diplomatic the 2 percent GDP growth rate in the year. rift in mid-2017, growth in Qatar has been supported by a suc- cessful rerouting of trade and higher levels of government cur- Fiscal deficits narrowed, supported both by rent and capital spending. Capital investment contributed 1.2 higher oil revenues and steady progress on mo- percentage points to GDP growth of 2.1 percent in 2018. bilizing non-oil revenues Kuwait returned to growth in 2018 following a contraction in Higher oil prices not only supported growth, they also helped 2017. GDP grew 1.5 percent in 2017 after contracting 3.5 per- improve fiscal accounts despite continued high spending in cent in 2017. The oil and the non-oil sectors each contributed some countries. Gains in oil revenue drove the reductions in half to growth. One of the few OPEC suppliers with spare pro- fiscal deficits in all GCC countries (Figure 3). Three of six duction capacity, Kuwait raised oil output to 2.75 mmbd in GCC countries implemented the planned 5 percent VAT on 2018 from 2.71 mmbd in 2017. Meanwhile, positive momen- schedule in 2018. Most countries contained government debt tum in non-oil activity was sustained throughout 2018. Rising accumulation in 2018, keeping gross government debt stocks oil prices and higher public-sector employment boosted house- close to their levels in 2017 (Figure 4). hold spending. Personal consumption rose 1.3 percent in the year, supported as well by bank consumer lending. Govern- The GCC governments returned to the international debt mar- ment consumption increased 1.6 percent. Real estate prices kets early in 2019 beginning with Saudi Arabia’s U.S.$7.5 stabilized after a correction in 2017. billion sovereign bond issue in January 2019 and followed by the Emirate of Sharjah’s U.S.$1.0 billion sukuk (Shariah law- Oman also rebounded from economic contraction in 2017 to compliant) sale in April. Saudi Aramco’s U.S.$10 billion bond growth in 2018. GDP growth was 2.1 percent in 2018, from a sale attracted more than U.S.$100 billion in bids in April. The 0.9 percent contraction in 2017. Net exports contributed a per- bond sale will fund Saudi Aramco’s purchase of the petro- centage point to GDP growth, while fixed investment and pri- chemical firm Saudi Basic Industries Corporation from the vate consumption each contributed half a percentage point. Public Investment Fund, in a deal that will raise cash for the Oman, which is not an OPEC member, raised oil production sovereign wealth fund. Altogether, issuances by GCC govern- from 0.97 mmbd in 2017 to 0.98 mmbd in 2018. ments, banks, and corporates totaled more than U.S.$31 billion in U.S. dollar-denominated fixed-rate bonds and U.S.$5 billion In contrast, growth decelerated in Bahrain, from 3.8 percent in sukuk in the first quarter of 2019. Meanwhile, the planned in 2017 to 2 percent in 2018. Investments in oil refining and inclusion by the investment firm JP Morgan of sovereign and aluminum helped mitigate the slowdown in the capacity con- quasi-sovereign debt issuers from Saudi Arabia, the UAE, Qa- strained crude oil sector. Capital investment, which had tar, Kuwait and Bahrain in the Emerging Markets Bond Index grown at an annual average 10.9 percent in 2016 -17, slowed (EMBI), in stages between January and September 2019 down to a 3.3 percent growth rate in 2018, constrained by the (Oman is already included in the EMBI), is expected to further strengthen international investor interest in GCC bonds and The fiscal deficit continued to fall in Oman, supported higher will likely result in portfolio investment inflows of U.S.$30 oil prices, new excise taxes, and a higher corporate tax rate. billion into GCC debt, according to one estimate. Higher oil prices, the introduction of the excise taxes on tobac- co products, energy drinks and soft drinks in August 2018, and Saudi Arabia halved its fiscal deficit. Oil revenues were higher the previous increase in the corporate tax rate from 12 percent not only from higher average oil prices in the year, but also to 15 percent in 2017 boosted oil and non -oil revenues in 2018. from an unplanned increase in oil production toward the end of The fiscal deficit narrowed from 12.9 percent of GDP in 2017 the year. The implementation of the 5 percent VAT in January to 7.7 percent of GDP in 2018. The higher than expected reve- 2018 and the introduction of excise taxes on tobacco, energy nue was an opportunity for deeper fiscal consolidation, but the drinks and soft drinks earlier in October 2017 boosted non-oil budget was overspent by 6 percent mainly due to increased revenues in the year. However, fiscal policy remained pro- investment in development projects, high electricity subsidies, cyclical with the unanticipated increase in oil revenues largely and debt servicing costs. used to increase spending, by about 10.8 percent in the year. The fiscal deficit was 4.6 percent of GDP in 2018 compared to Fiscal imbalances, while improved, remained high in Bahrain. 9.2 percent in 2017. The oil price recovery lowered the fiscal deficit from 14.2 percent of GDP in 2017 to 11.7 percent in 2018. Bahrain The UAE contained its fiscal deficit at under 2 percent of adopted a Fiscal Balance Program in October 2018, supported GDP. The UAE implemented the 5 percent VAT as planned in by a U.S.$10 billion financial support package from Saudi January 2018, after introducing the excise taxes on tobacco Arabia, the UAE and Kuwait. The aid package consists of products, energy drinks and soft drinks in October 2017, loans, grants, and deposits, spread over five years, in return boosting non-oil revenues in 2018. The government also de- for which Bahrain pledged to eliminate its fiscal deficit by creased expenditures, keeping the fiscal deficit at 1.6 percent 2022 and reduce its public debt. Bahrain ’s fiscal deficit had of GDP. deteriorated significantly, from 1.6 percent of GDP in 2014 to 17.6 percent in 2016. Public debt had also ballooned from Qatar posted a fiscal surplus, the first since 2014. Although it 44.4 percent of GDP in 2014 to 81.3 percent in 2016 follow- has deferred the implementation of the 5 percent VAT to 2020 ing the steep decline of oil prices beginning in mid -2014. The and has yet to announce a date for the introduction of the ex- GCC financial support has helped alleviate financing concerns cise taxes on tobacco products, energy drinks and soft drinks, for now. Market reaction has been favorable, and bond Qatar managed to achieve a fiscal surplus. of 2 percent of GDP spreads have since declined. in 2018 by keeping a lid on expenditures. The government pared back its ambitiously large public investment program for External accounts strengthened in 2018 with the 2014-24 by U.S.$50 billion, from U.S.$180 billion to U.S.$130 rise in oil prices, except for Bahrain billion. Priority remains with infrastructure projects related to the country’s hosting of the FIFA World Cup in 2022. The All GCC countries apart from Bahrain reported improvements surplus in 2018 reverses the fiscal deficit of 5.8 percent of in their current accounts in 2018 from higher oil prices. Sizable GDP in 2017. surpluses on merchandise trade, buoyed by healthy oil export revenues, offset deficits in services trade and in the primary Fiscal pressures eased in Kuwait with rising oil prices. The and secondary income accounts. Current account surpluses fiscal balance, measured by excluding investment income and rose in Saudi Arabia, the UAE, Qatar, and Kuwait (Figure 5). before compulsory transfers of oil revenue to the country’s inter-generation savings platform, the Future Generations Saudi Arabia saw a sharp increase in the current account sur- Fund, narrowed from a deficit of 9 percent in 2017 to an esti- plus, but capital flows were more mixed. Oil exports increased mated deficit of 1.6 percent in 2018. The underlying fiscal bal- from U.S.$170 billion in 2017 to U.S.$214 billion in 2018. ance, measured by excluding investment income and after Merchandise trade was in surplus at 14.4 percent of GDP in compulsory transfers of oil revenue to the Future Generations 2018, more than double from 6.2 percent of GDP in 2017. Pri- Fund, in fact worsened from a deficit of 9 percent of GDP in mary and secondary incomes were in deficit, as they had been 2017 to a deficit of 10.9 percent of GDP in 2018. Fiscal con- in the past decade, as remittance outflows grew 20 percent solidation has proceeded slowly in Kuwait. The rationalization from 2017. The trade surplus exceeded the primary and second of electricity and water subsidies has slowed. Excise taxes on incomes deficit, taking the current account balance to a surplus tobacco products, energy drinks, and soft drinks have not been to 8.4 percent of GDP in 2018, up from 1.5 percent of GDP in introduced, and no date has been announced for their imple- 2017. After a lengthy period of lackluster performance, net mentation. Implementation of the VAT has been postponed to FDI inflows recovered moderately to 2 percent of GDP in 2021. Facing a delay with the introduction of the VAT, the 2018, but barely enough to cover net portfolio and other invest- government has explored alternative means to raise non -oil ment outflows of 6.4 percent of GDP. revenues, by re-pricing government services, enforcing penal- ties on businesses for not meeting workforce nationalization The UAE current account surplus rose slightly. Merchandise quotas, and strengthening revenue collection, including for trade was in surplus at 20.6 percent of GDP, as oil exports rose public utilities. from 15.2 percent of GDP in 2017 to 17.8 percent of GDP in Bahrain reported a higher current account deficit. The current Exports and imports of goods, services trade (net), account deficit widened from 4.5 percent of GDP in 2017 to 5.8 percent in 2018, mainly due to an increase in workers ’ re- primary and secondary income (net), and current mittance outflows. As with Oman, it was the fourth straight account balance, Percent of GDP year of current account deficits for Bahrain. Merchandise trade was in surplus in the year, 16.7 percent of GDP, but primary 100 75 and secondary incomes were in deficit at 19.9 percent of GDP. 50 The financial account balance was also in deficit at 3.4 percent 25 of GDP, with net other investment outflows exceeding net FDI 0 -25 and net portfolio investment inflows. The balance of payments -50 was in deficit at 3.4 percent of GDP. International reserves -75 continued to fall in the year, to U.S.$2 billion in end -2018, -100 barely a month of imports, from U.S.$2.6 billion in end -2017, 2014 2016 2018 2018 2014 2014 2016 2016 2018 2018 2014 2016 2016 2018 2018 2014 2014 2016 some 2.5 months of imports (Figure 6). Saudi UAE Qatar Kuwait Oman Bahrain Arabia Central banks hiked policy rates and banks in- Primary and secondary income, net Service trade, net creased credit to the private sector, while infla- Imports of goods Exports of goods tionary pressures were muted. Current account balance Maintaining their currency pegs to the U.S. dollar, most GCC central banks raised policy rates in tandem with the U.S. Fed- 2018. Primary and secondary incomes were in deficit at 13.4 eral Reserve. The Saudi Arabia Monetary Authority, the Cen- percent of GDP in the year, up from 10.1 percent of GDP in tral Bank of the United Arab Emirates, and the Central Bank of 2017. The current account surplus stood at 7.2 percent of GDP Bahrain matched all four rate hikes by the U.S. Federal Re- in 2018, slightly higher than 6.9 percent of GDP in 2017. serve in March, June, September and December 2018 (Figure 7). Policy rates in the three countries rose by 100 basis points Qatar more than doubled its current account surplus Higher gas each over 2018. The Central Bank of Oman increased policy prices and production from the North Field, the country’s larg- rates monthly in 2018, taking the repo rate from 1.949 percent est gas field, drove exports higher to 52.8 percent of GDP in in December 2017 to 2.934 percent in December 2018, a near- 2018. Imports remained constant from 2017, taking merchan- ly 100 basis point rate hike as well. The Central Bank of Ku- dise trade to a surplus of 16.7 percent of GDP in 2018. Primary wait raised rates only once, by 25 basis points in March 2018, and secondary income deficits broadly tracked the outturns in citing growth concerns and availing of the flexibility of its bas- 2017, and the current account surplus rose to 7.5 percent of ket peg. And Qatar Central Bank did not raise rates at all, GDP in 2018 from 3.8 percent of GDP in 2017. The financial keeping the repo rate unchanged since December 2017, at 2.5 account balance was in deficit at levels only slightly higher percent, reflecting efforts to support the economy’s adjustment than in 2017, 15.6 percent of GDP, with net FDI, net portfolio to the effects of the diplomatic rift. investment, and net other investment posting outflows. Banks increased credit to the private sector, supporting growth. The external position remained healthy in Kuwait. Oil exports In Saudi Arabia, bank credit to the private sector increased by topped 15.6 percent of GDP, and non-oil exports, 20 percent. almost 3 percent in 2018 after contracting in 2017 (Figure 8). Merchandise trade was in surplus at 7.1 percent of GDP in Private sector credit growth averaged 4 percent in the UAE and 2018, three times the 2.3 percent in 2017. Primary and second- Kuwait. In Qatar, bank credit to the private sector recovered ary incomes was in surplus at roughly the rate in 2017, 3.3 from a sharp decline in 2016 and 2017 to grow at 13 percent in percent of GDP, taking the current account balance to 10.4 2018. The sole exception, private sector credit growth in Oman percent of GDP in 2018, almost twice the 5.9 percent in 2017. declined for the third straight year in 2018 but remained at the The financial account balance was in deficit for the year at 7.9 6 percent range, slightly above the growth rate reported by the percent of GDP, with net portfolio investment posting an in- UAE and Kuwait. flow but net FDI and net other investment posting outflows. Headline inflation rose in Saudi Arabia, the UAE and Bah- The current account deficit narrowed in Oman, from 15.3 per- rain. The implementation of the 5 percent VAT raised con- cent of GDP in 2017 to almost 5.7 percent of GDP in 2018. sumer price inflation in Saudi Arabia and the UAE in 2018 Yet, it was the fourth straight year of current account deficits (Figure 9). The effects of the VAT are not expected to per- for Oman. Merchandise trade was in surplus in 2018 at 11.8 sist, however. The inflation rate in Saudi Arabia in 2018 also percent of GDP but primary and secondary incomes were in reflected increases in administered prices and the levies on deficit at 17.6 percent of GDP. International reserves continued expatriate workers, which, together with the exit of expatriate to decline with the balance of payments deficit and stood at workers, increased business costs and raised prices. In Bah- U.S.$17 billion in end-2018, some 8.4 months of imports, from rain, higher food prices and transport costs raised the con- U.S.$20 billion in end-2016, about 11.3 months of imports. sumer price inflation rate. Reserves excluding gold Policy rates Months imports of goods (end-of-period) Percent 60 5.0 50 4.0 40 3.0 2.0 30 1.0 20 0.0 Oct-2014 Oct-2016 Oct-2017 Oct-2015 Oct-2018 Jan-2014 Jan-2015 Jul-2015 Jul-2016 Jan-2017 Jan-2018 Jul-2018 Jul-2014 Jan-2016 Jul-2017 Jan-2019 Apr-2014 Apr-2015 Apr-2016 Apr-2017 Apr-2018 10 0 2014 2015 2016 2017 2018 Saudi Arabia UAE Qatar Kuwait Saudi Arabia UAE Qatar Kuwait Oman Bahrain Oman Bahrain U.S. Bank credit to the private sector CPI Inflation Percent change Percent 25 5.0 20 4.0 15 3.0 10 2.0 5 1.0 0 -5 0.0 -10 -1.0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Saudi Arabia UAE Qatar Saudi Arabia UAE Qatar Kuwait Oman Bahrain Kuwait Oman Bahrain Inflation declined in Oman and Kuwait and remained subdued projects, SMEs, and industrial and social projects. Dubai allo- in Qatar. Lower food prices slowed consumer price increases cated U.S.$7 billion for Expo 2020 related infrastructure. Saudi in Oman and Kuwait. Declining housing costs were also a fac- Arabia’s Vision 2030 has spurred reforms in several areas, in- tor in Kuwait. cluding a large switch to gas and renewables for domestic ener- gy, and business environment, SME and financial sector re- The GCC countries also made steady progress on forms. In Bahrain a competition law was promulgated, privati- implementing structural reforms to boost com- zation plans have been announced for logistics sector and the petitiveness and growth Supreme Council for Women discussed initiatives to promote female labor force participation (See Box 2 for a list of selected Some countries introduced important structural reforms related reforms introduced in 2018 across the GCC). to doing business, investment climate, and labor markets. These included lowering fees, easing business licensing, liberalizing foreign ownership, and long-term visas to attract skilled profes- Near-term prospects sionals. Stimulus packages were also announced to compensate for the dampening of growth in the oil sector and support pri- vate sector investment. Abu Dhabi approved a AED 50 billion Forecasts of a more difficult global environment in the near economic stimulus program covering infrastructure, legislative term will continue to pose challenges to the GCC countries. Global growth is expected to moderate further (Box 3). The Near term growth will largely be supported by volatility in oil prices is expected to persist, with muted growth higher spending on mega projects and new hy- forecasts dampening prices, while uncertainty in supply creates drocarbon ventures both upside and downside risks. Risks to the global outlook are predominantly on the downside and make the global outlook Lower oil prices and production will likely temper growth over more uncertain. the forecast period, 2019-21. Oil production cuts of 1.2 million barrels a day agreed among the OPEC suppliers and their non - Going forward, growth in the GCC will largely be deter- OPEC partners in December 2018 will dampen oil sector mined by a combination of oil and gas performance as well growth in the GCC in the first half of 2019 (the agreement ap- as implementation of ambitious public investment plans. plies to the January-June 2019 period). Continued lower oil Given their continued high dependence on hydrocarbons, prices over 2019-21 in an environment of slower global growth growth during the forecast period 2019 -21 will continue to would keep growth muted over the forecast period. be driven by oil and gas prices and production, notwithstand- ing current efforts at economic diversification (Table 1). Because the relative size of oil GDP varies among the GCC, Although private sector stimulus programs, productive infra- the impact of lower oil prices and production on economic structure investments, and business climate reforms are un- growth would also vary. The oil sector accounts for more than derway, the transformation of the GCC economies away half of GDP in Kuwait and half in Qatar, but for under a third from a dependence on oil will take some time to accomplish. in the UAE and a fifth in Bahrain (Figure 10). The UAE econ- Some leading indicators continue to point to sluggish growth omy turns out to be the most diversified in the GCC when con- over the medium term. For example, an index for external sidering dependence on oil revenues and oil exports as well. demand shows declining trends in the growth of expected Yet, economic growth in the UAE, which serves as the re- demand over the next five years, as the economies of key gion’s major commercial hub, also remains reliant on regional trading partners slow down 1. liquidity which is still largely oil-dependent. Government and private infrastructure investment and related non-oil activity is expected to play a greater role in shaping 1/ World Bank, 2019g. growth during the forecast period. Mega projects associated with the economic transformation programs launched in 2015 - 16 could boost fixed investment, construction activity, and Oil GDP overall growth. There are also ongoing infrastructure projects, Percent of GDP not linked with the transformation plans but related to interna- tional events --- the World Expo in Dubai in 2020 and the FIFA World Cup in Qatar in 2022 --- that should contribute to activity in 2019-21. Kuwait New oil and gas projects may further support growth over the Qatar forecast period. Many of these projects rehabilitate existing Saudi Arabia facilities or extend existing lines. But some are new develop- ments in old or new oil and gas fields. These projects will ex- Oman pand the hydrocarbon production and export capacities of the GCC countries. They are being aggressively pursued even as UAE the GCC countries espouse transformation objectives that aim Bahrain to reduce the dependence of their economies on oil and gas production, revenues, and exports. 0% 20% 40% 60% 80% 100% Oil GDP Non-oil GDP GCC gas projects appear to be aligned with long -term fore- casts for a global energy future in which natural gas and re- newable energy will play significant roles. According to the 2019 edition of British Petroleum’s Annual Energy Outlook, GDP growth, real world energy demand is projected to grow by a third through Percent 2040, driven by rising consumption in China, India, and other parts of Asia. Most of that new energy --- as much as 85 per- cent --- would come from burning natural gas and drawing 6 from renewable power. Natural gas consumption is forecast to grow by 50 percent over the next 20 years, driven by the elec- 4 tric power sector, industry, and the transportation sector. Most of the new supply is expected to come from the U.S., Qatar, 2 and Iran. 0 Capital investment will be a large driver of regional growth. Growth in the region in 2019 is projected to match that in -2 2018, at 2.1 percent, before accelerating to 3.2 percent in 2020 -4 and stabilizing at 2.7 percent in 2021. Except for Bahrain, the Saudi UAE Qatar Kuwait Oman Bahrain GCC countries are projected to post growth rates at or above 3 Arabia percent in 2020 (Figure 11). Capital investment will mainly 2017 2018 2019f 2020f 2021f drive growth during the forecast period (Figure 12), reflecting government and private investment in mega projects and in new hydrocarbon ventures. Projected contributions to GDP growth Oil production cuts will constrain growth in Saudi Arabia. Percentage points Growth in the GCC’s biggest economy is projected to average 2.4 percent over 2019-21. As the OPEC’s largest and the world’s third largest oil producer (after the U.S. and Russia), 8 Saudi Arabia would bear the brunt of oil production cuts 4 agreed between the OPEC suppliers and their non -OPEC part- ners. Consequently, GDP growth is expected to weaken to 1.7 0 percent in 2019 before it picks up to 3.1 percent in 2020 as -4 production cuts are reversed. Saudi Arabia has prioritized the expansion of its natural gas output and the Saudi Arabian Oil -8 2017 2017 2017 2017 2017 2017 2019f 2021f 2019f 2021f 2019f 2021f 2019f 2021f 2019f 2021f 2019f 2021f Company (Saudi Aramco) is expected to put the Hawiyah and Haradh Gas Plant Expansion Projects out to tender during the period. Meanwhile, non-oil growth is expected to be supported Saudi UAE Qatar Kuwait Oman Bahrain Arabia by government spending on large infrastructure projects planned under the country’s economic transformation plan, Net exports of goods and services Fixed investment Public consumption Private consumption Vision 2030, which should have positive spillover effects on GDP Selected reforms and growth initiatives announced in 2018-19 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Selected reforms and growth initiatives announced in 2018-19 • • • • • • • • • • • • • • private non-oil activity. Saudi Arabia also aims, under Vision Arabia. A key aim is to bolster oil refining capacity with the 2030, to develop a substantial domestic manufacturing capabil- construction of the new U.S.$16 billion Al Zour Refinery and ity in defense and pharmaceuticals and to create a logistics hub the series of upgrades to old refineries under the U.S.$12 bil- for the GCC region. These initiatives would impact growth in lion Clean Fuels Project, both of which are expected to become the medium term. operational in 2020. Among non-oil initiatives, the revival of the long-stalled National Rail Network Project (the first 265- The economic recovery in the UAE is expected to strengthen kilometer phase of which would connect the southern border over the forecast period, powered by fiscal stimulus With the with Saudi Arabia to Kuwait City and to the port on Bubiyan UAE as OPEC’s fourth largest oil producer (after Saudi Ara- Island) and the launch of the National Gulf Gateway Project bia, Iraq, and Iran), growth would likely be muted in 2019 as (which aims to link the country’s hinterland with China’s Road oil production cuts take effect in the first half of the year. and Belt Initiative of railways, pipelines and ports across the Growth, however, is projected to pick up to 3 percent in 2020 region) could further boost growth if the projects were imple- and 3.2 percent in 2021, spurred by Dubai ’s hosting of the mented during the period. World Expo in 2020 and Dubai ’s and Abu Dhabi’s imple- mentation of the economic stimulus plans announced in 2018. Oman could post a one-off growth spike in 2020. The start of World Expo 2020, for which Dubai had allocated U.S.$7 bil- production at the U.S.$5 billion Raba Harweel Project, the lion for infrastructure construction, is expected draw large largest undertaking by Petroleum Development Oman, and a numbers of international visitors from132 participant coun- planned sizable investment in the Khazzan gas field, jointly tries which should boost both private consumption and ser- owned by British Petroleum and Oman Oil and slated to in- vices exports in 2020. The stimulus plan for Dubai, which crease natural gas production by 50 percent to 1.5 billion cubic has a diversified economy, is directed at technology entrepre- feet per day, could spur GDP growth in Oman to 6 percent in neurship, while that for Abu Dhabi, which is more reliant on 2020. Thereafter, growth is projected to slide back to 2.8 per- oil, is focused on industrial and small and medium enterprise cent in 2021. Growth toward the end of the forecast period is (SME) projects. expected to be supported by private non-oil investment, includ- ing from allowing a hundred percent foreign ownership of Growth in Qatar is expected to continue rising over 2019 -21. business firms (subject to a threshold on capital), implementing The U.S.$10 billion Barzan Natural Gas Facility, which will a proposed new Foreign Capital Investment Law, liberalizing come onstream in 2020, should boost liquefied natural gas key sectors of the economy, and increasing the use of Public - (LNG) and pipeline gas exports by the world ’s fourth largest Private Partnerships (PPP). gas producer and second largest gas exporter (behind Russia and ahead of Norway). The North Field Gas Expansion Pro- Growth is projected to be muted in Bahrain. The front -loading ject, which will add 100 million tons a year to production, will of the Fiscal Balance Program, a condition to the U.S.$10 not be completed until 2024 and falls outside the forecast peri- billion financial assistance package provided by Saudi Arabia, od, but construction activity on the project should contribute the UAE and Kuwait, will keep GDP growth flat at around 2 to growth in 2019 -21. Qatar’s decision in January 2019 to percent in 2019 -20, even as the new pipeline linking Bahrain withdraw from the OPEC (Qatar is one of the OPEC ’s small- Petroleum Company’s refinery to a Saudi Aramco plant ex- est producers, supplying only 2 percent of the group ’s output) pands processing capacity by 35 percent and the newly will enable it to raise oil production independent of the opened potline at Aluminum Bahrain (Alba) raises aluminum group’s decision, albeit modestly, with output still inhibited production capacity by over 50 percent. Production from the by capacity constraints. Growth will also be supported by the country’s newly-discovered major oil and gas field, the implementation of projects under the country ’s economic Khaleej Al Bahrain, (the discovery was disclosed in April transformation program, National Vision 2030. As part of the 2018) would probably not commence during the forecast peri- program, the government plans to invest some U.S.$16.4 bil- od (contracts for development of the field are yet to be award- lion in infrastructure and real estate projects over the next four ed). Reserves in the field are reportedly estimated at 80 billion years. Meanwhile, continued spending on infrastructure relat- barrels, far exceeding the country’s proven oil reserves of ed to Qatar’s hosting of the FIFA World Cup in 2022 should 124.6 million barrels. However, production from the Sitra contribute to growth during the forecast period. Overall, GDP Refinery Expansion Project, which would expand processing growth is expected to rise to 3.4 percent by 2021 from 2.1 capacity by 35 percent, could contribute to growth in 2019 -21 percent in 2018. (Bahrain Petroleum Company expects to complete the project by 2019). Work on the country’s rail network could also con- Kuwait’s economy will strengthen in 2019-21. Growth will tribute to growth during the forecast period (the government likely be subdued at 1.6 percent in 2019, considering the domi- plans to award bids for construction in the fourth quarter of nance of the oil sector in the economy (more than half of GDP, 2019), albeit modestly as fiscal consolidation would likely the highest ratio in the GCC) in OPEC’s fifth largest oil pro- constrain spending. Growth could be expected to pick up to ducer (after Saudi Arabia, Iraq, Iran and the UAE). Thereafter, 2.8 percent in 2021, aided in part by business -friendly policies growth will strengthen to an annual average 3 percent in 2020- --- a new bankruptcy law, an open-data law, and cyber - 21, boosted by the resumption of oil production from the security regulations --- and by potential efficiency gains from Khafji and Wafra oil fields which Kuwait shares with Saudi the fiscal consolidation program. Global Outlook and Risks 1/ Forecasts on global growth and trade cited in this section are drawn from World Bank, Global Economic Prospects – Darkening Skies, January 2019, updated in April 2019. Forecasts of oil prices are drawn from World Bank, Commodity Markets Outlook, April 2019. GDP growth projections World trade volume growth projections Percent, year-on-year Percent, year-on-year 3.2 5.0 6.0 3.1 4.0 5.5 3.0 3.0 5.0 2.9 2.0 4.5 2.8 1.0 4.0 2.7 3.5 2.6 0.0 2017 2018 2019f 2020f 2021f 3.0 World (lhs) 2017 2018 2019f 2020f 2021f Advanced economies (rhs) Emerging market and developing economies (rhs) April 2019 November 2018 Target for the Federal Funds rate, March 2019 Crude oil price projections Percent U.S.$ per barrel 4.0 78 3.5 73 3.0 68 2.5 2.0 63 1.5 58 1.0 53 0.5 48 0.0 2019 2020 2021 2017 2018 2019f 2020f 2021f Median April 2019 November 2018 Fiscal deficits will persist in most of the GCC, on modest fiscal expansion that may be justified in the short highlighting the need to be more vigilant about term. Bahrain, however, stands as an exception, as an extreme medium term fiscal sustainability reliance on oil revenues and persistently large fiscal deficits in over a decade have drawn down fiscal buffers to perilously Fiscal deficits are projected to persist in 2019-21 in four of the low levels. six GCC countries. Energy subsidy reform, excise taxes, and the VAT are only beginning to make a dent on fiscal deficits In Saudi Arabia, achieving the balanced budget target in 2023 (Figure 13 and Figure 14). Only Saudi Arabia, the UAE, Oman will be contingent on a rise in oil receipts or resumption of fiscal and Bahrain introduced excise taxes in 2017. These countries consolidation. The budget for 2019 raises total public spending also implemented the 5 percent VAT in 2018. Moreover, the by 7.3 percent, including capital expenditures by 19.9 percent, GCC countries are increasingly using stimulus programs to largely to fund mega projects under Vision 2030. The budget support growth in response to lower oil price projections and to forecasts the fiscal deficit to narrow to 4.2 percent of GDP in OPEC production cuts. This partly explains the slower than 2019 from 4.6 percent of GDP in 2018. But a more conservative expected pace of fiscal consolidation. Additionally, govern- set of assumptions on oil prices, oil production levels, and non- ments seem concerned about the social effects of new taxes oil revenue growth should take the deficit closer to 5.2 percent and expenditure cuts. Political opposition to fiscal reform is of GDP. Thereafter, the deficit can be expected to range from also widespread in some countries. 4.1 percent of GDP in 2020 to 3.3 percent of GDP in 2021. The government will likely keep current spending (typically three- While a slower pace of fiscal adjustment may be justified for fourths of total government expenditures) elevated to support some countries in the short-term, fiscal consolidation should re- growth. Savings from energy subsidy cuts are expected to be sume in the medium term. Some GCC countries have embarked partly deposited in the Citizens Account Program, the national Oil revenues Fiscal balance Percent of total fiscal revenues Percent of GDP 5 Kuwait 0 Qatar Bahrain -5 Oman -10 Saudi Arabia -15 UAE -20 Saudi UAE Qatar Kuwait Oman Bahrain 0% 20% 40% 60% 80% 100% Arabia Oil revenues Non-oil revenues 2017 2018 2019f 2020f 2021f cash transfer scheme, and used to compensate low-income fami- would finally be implement in 2020. Relatedly, Qatar has yet lies, and partly directed at capital spending for Vision 2030 pro- to announce an implementation date for the excise taxes on jects. To increase revenue mobilization, the mandatory registra- tobacco products, energy drinks and soft drinks originally tion threshold for the VAT was revised in 2019 from a turnover scheduled for 2017. But the introduction of the excise taxes of SAR 1,000,000 (U.S.$267,000), conservatively set when the might also be forthcoming considering the creation of the tax tax was introduced in January 2018, to SAR 375,000 body. The projections of fiscal surpluses during the forecast (U.S.$100,000). period have been conservatively estimated, as Qatar ’s fiscal flexibility remains constrained by demand for compensatory The UAE could post small fiscal surpluses in 2019-21. The government spending, including for public wages, welfare estimates are for surpluses of 0.6 percent of GDP in 2019 and payments, and food subsidies, to mitigate the economic effects 1.3 percent of GDP in 2021. Emirate and federal budgets for of the country’s diplomatic rift with Saudi Arabia, the UAE 2019 feature increases in government spending across the and Bahrain. board (the Dubai and Abu Dhabi budgets constitute the major portion of the UAE consolidated budget, while the federal The delay in the implementation of the VAT and higher gov- budget comprises only a tenth of consolidated spending). The ernment spending are expected to keep Kuwait’s fiscal ac- Abu Dhabi budget is expansionary. At AED (United Arab counts in deficit in 2019-21. The fiscal balance, measured to Emirates dirham) 60 billion (U.S.$16.3 billion), the federal exclude investment income but before mandatory transfers of budget is the largest in the federation’s history, with half of oil revenue to the country’s inter-generational savings plat- spending earmarked for education and social development. The form, the Future Generations Fund, (the government ’s pre- Dubai budget also raises spending, but comparatively moder- ferred metric), is projected to slide to a deficit of 3.4 percent of ately as most infrastructure projects for World Expo 2020 have GDP in 2019 and 2.6 percent of GDP in 2021. The underlying been completed (Dubai had allocated U.S.$7 billion for these fiscal balance, measured to exclude investment income and projects). Revenues from excise taxes introduced in 2017 and after mandatory transfers to the Future Generations Fund, the VAT implemented in 2018 will help lift fiscal surpluses would take the deficit higher to 6.1 percent of GDP in 2019 higher through 2020 and 2021. Nevertheless, as property prices and 7.5 percent of GDP in 2021. The introduction of the VAT, continue to fall, by almost 25 percent since 2014, and new sup- expected in 2021, should reduce budgetary pressures in the last ply comes onto the market over the forecast period, debt risks year of the forecast period. could emerge in the real estate sector. Continued high public spending amid lower oil prices could Qatar will likely maintain a fiscal surplus over the forecast widen the fiscal deficit in Oman during the forecast period, and period. The budget for 2019 has revenues growing more rap- delayed fiscal adjustment raises concerns over sustainability. idly than expenditures, resulting in a surplus projected at 1.3 The budget for 2019 assumes an increase in total expenditures percent of GDP in 2019. Forecasts of higher surpluses of 2 of around three percent. The fiscal deficit is projected at a high percent of GDP in 2020 and 2.3 percent of GDP in 2021 as- 12.2 percent of GDP in 2019, with the high wage bill a detri- sume the implementation of the VAT in 2020, two years be- ment to better fiscal performance. The introduction of the hind schedule. The creation of General Tax Authority in De- VAT, expected in 2020, the increase in utility tariffs for large cember 2018 gives credence to the forecast that the VAT businesses, and the buildup of gas revenues from the Khazzan Oil exports Current account balance Percent of total goods exports Percent of GDP 15 Kuwait 10 Qatar 5 Saudi Arabia 0 -5 Oman -10 UAE -15 Bahrain -20 Saudi UAE Qatar Kuwait Oman Bahrain 0% 20% 40% 60% 80% 100% Arabia Oil exports Non-oil exports 2017 2018 2019f 2020f 2021f gas field should enable the government to narrow the deficit to UAE (Figure 15). The softer global growth and oil market 8.6 percent of GDP in 2020 and 6.4 percent of GDP in 2021. forecasts prompt a renewed focus on non -oil exports. These projections assume that Oman would be able to muster the political will to implement the VAT, though two years be- Current account balances are projected to remain in surplus in hind schedule, and to advance a second round of utility tariff the larger GCC countries in 2019-21. The smaller economies, rate hikes. Oman and Bahrain, are projected to continue to post current account deficits (Figure 16). The external account dynamics in Bahrain’s fiscal deficit should decline if the country adheres each country will additionally depend on performance in ser- to the Fiscal Balance Program adopted in 2018. The fiscal vices trade and on developments in the primary and secondary deficit is projected to reach 8.4 percent of GDP in 2019, con- income accounts. Returns from sovereign wealth fund invest- siderably lower than 14.2 percent of GDP in 2017, and further ment abroad, interest payments on external debt, and profit narrow to 7.4 percent of GDP by 2021 (the Fiscal Balance repatriation by foreign companies operating in the GCC figure Program targets a balanced budget by 2022). The excise taxes prominently in primary income dynamics. Meanwhile, outward on tobacco products, energy drinks and soft drinks, and the 5 remittances by expatriate labor typically drive secondary in- percent VAT, both introduced in January 2019, will help raise come outcomes in the GCC. non-oil revenues by around 1.3 percentage points of non-oil GDP annually in 2019 and 2020. Other fiscal reform measures The current account surplus is projected to narrow in Saudi under consideration should help contain the deficit and in- Arabia. Lower oil prices and production would lead to a re- clude: a voluntary retirement plan for civil servants, which newed weakening of oil exports in 2019 and 2020. However, should help reduce the public wage bill; an overhaul of the rising export volumes of aluminum, phosphates, and petro- subsidy system, to focus on the most needy beneficiaries; a chemicals, the latter boosted by the ramping-up of production wide-ranging review of government services and fees; im- from the giant Sadara integrated chemical plant, should support provements in spending efficiency, as well as in accountabil- non-oil exports. The merchandise trade balance is forecast to ity; and the creation of a debt management office, to oversee remain in surplus, although at a declining ratio to GDP over state borrowing. the period. The merchandise trade surplus will likely be offset by a widening services trade deficit. The current account sur- While current account balances are projected to plus is projected to moderate from 8.4 percent of GDP in 2018 remain in surplus, focus on growing non-oil ex- to an average 6.9 percent of GDP in 2019-20 and 6.2 percent ports will be critical to build resilience. of GDP in 2021. Primary income debits are expected to in- crease, from interest payments on a growing debt stock. Mean- Trade balances, in surplus in 2017-18, are expected to come while, accelerated workforce nationalization efforts and re- under pressure in 2019-21. Forecasts of lower oil prices and straints on money transfers could help keep a lid on outward production, due to dimmer global growth prospects over 2019 - remittances and secondary income debits. The financial ac- 21 and to oil production cuts in the first half of 2019, will exert count balance is projected to be in deficit during the period, as pressure on overall trade performance by the GCC countries. the Public Investment Fund, seeks new investment abroad. The Oil exports account for three fourths or more of all goods ex- balance of payments is forecast to be in surplus, enabling Saudi ports in Kuwait, Qatar, Saudi Arabia, and Oman and half in the Arabia to add to international reserves. Lower oil prices and higher imports would moderate the cur- The current account will likely remain in deficit in Oman in the rent account surplus in the UAE. A modest increase in non-oil near term. Merchandise trade is forecast to be in surplus in merchandise exports will likely keep the trade balance in sur- 2019-21, but services trade, in deficit. Gas exports from the plus during the forecast period, notwithstanding higher capital Khazzan gas field will most likely boost exports, but imports goods imports related to economic growth and to the country’s will also rise, albeit more gradually, with growing consumer infrastructure program. Service exports will likely outpace demand and a pickup in investment. Services trade will be service imports in 2020-21, with the World Expo in Dubai in helped by ongoing huge investments in tourism projects and 2020. Moreover, an anticipated modest recovery in regional recent government tourism promotion efforts. The primary liquidity could raise demand for UAE tourism and financial income deficit will persist, with profit repatriation by foreign services. The primary and secondary income accounts will companies. The secondary income deficit will grow, with out- likely remain firmly in deficit, with secondary income debits, ward remittances, reflecting the continued dependence by the mainly remittance outflows from the country’s large expatriate private sector on foreign labor despite workforce nationaliza- workforce, outpacing primary income credits, principally re- tion efforts. The current account deficit is projected to top 10.3 turns on the government’s foreign assets. The current account percent of GDP in 2019 before narrowing to 4.9 percent of balance is projected to moderate from a forecast 7.8 percent of GDP by 2021. External financing needs will put pressure on GDP in 2019 to 5.6 percent of GDP by 2021. international reserves, which are forecast to drop to less than five months of imports. Capital goods imports will likely narrow the current account surplus in Qatar. Qatar’s current account surplus had been in The external position will remain challenging in Bahrain. The the 30-percent-of-GDP range until 2014. Large infrastructure- current account deficit is projected to average around 3.6 per- related capital goods imports will diminish these large surplus- cent of GDP in 2019-21. Surpluses on merchandise and ser- es. Service exports are expected to be buoyed by tourism activ- vices exports will likely be offset by huge deficits in the prima- ity ahead of the FIFA World Cup in 2022 and by recent en- ry and secondary income accounts. Interest payments would deavors by Qatar Airways and Milaha, the national maritime drive the deficit on primary income, reflecting the country’s and logistics company, to establish new international transport huge debt stock. And remittances would keep the deficit on routes (to replace routes made inoperational by the country’s secondary income large, reflecting the continued over -reliance diplomatic rift with Saudi Arabia, the UAE and Bahrain). on foreign labor by the construction industry and the financial Nonetheless, historically-high service imports will likely keep sector. Bahrain’s inclusion in the JP Morgan Emerging Mar- the services trade account in deficit. Primary income credits kets Bond Index (EMBI), beginning in January 2019, could will probably suffer from the ongoing liquidation of foreign bolster portfolio investment inflows. However, net private cap- assets by the sovereign wealth fund, the Qatar Investment Au- ital outflows will likely continue, resulting in balance of pay- thority, and primary income debits will rise with increased ments deficits throughout the forecast period. International payments on the country’s growing stock of external debt. The reserves will likely stay at about a month of non -oil imports. current account surplus is projected to firm to an average 7.7 percent of GDP in 2019-21. The financial account balance is expected to post deficits in the forecast period, with net FDI, Risks and long-term challenges net portfolio investment, and net other investment all expected- ly reporting outflows. Balance of payments deficits are project- ed to persist until around 2020. Amid a muted outlook for the global economy, the GCC must persevere with structural reforms, The current account surplus is also expected to narrow in including stronger fiscal management, econom- Kuwait. The growth in oil exports, nine -tenths of merchan- ic diversification, and human capital formation dise exports, is expected to stabilize. Infrastructure -related imports over the forecast period will likely reduce the trade In addition to global risks, regional risks pose challenges to the surplus Primary income flows will rise with reparation pay- economic performance of the GCC countries over forecast ments from Iraq; the first tranche of U.S.$90 million was period and to their economic plans over the medium to long - received in April 2018. Secondary income outflows are ex- term. The main global risk is the expected slowdown in global pected to rise with the increase in remittances, albeit at an growth that is likely to impact demand for oil and non -oil ex- expectedly slower pace than in the past as workforce nation- ports. While financing conditions have improved recently in alization efforts make some progress. The current account light of the pause of Fed rate hikes in 2019, the risk of a re- surplus is projected to moderate to 7.6 percent of GDP in sumption in monetary policy tightening could materialize in 2019 and 5.7 percent of GDP in 2021, from 10.4 percent of the medium-long term. This will impact the smaller GCC GDP in 2018. The financial account balance is projected to economies more acutely, but also would create the challenge remain at a deficit with net FDI and net portfolio investment for all the GCC countries to balance the need to follow the outflows exceeding net other investment inflows by an esti- U.S. Fed to maintain the peg with that of ensuring interest rates mated 3 to 5 percentage points of GDP. The balance of pay- don’t stifle economic growth. A key domestic risk is the slow- ments is forecast to be in surplus at an average 2 percent of ing pace of reforms across the region. The slack may be moti- GDP in 2019-21. vated by various factors including the increase in oil prices over 2017-18 which rendered fiscal consolidation and econom- ic diversification seemingly less urgent, political tussles over Estimated revenue from the 5 percent VAT the necessity and urgency of tax reform and expenditure reduc- Percent of GDP tion, and popular angst over the size and pace of potential re- ductions in public employment, public wages, and subsidies. Overall, the GCC countries must persist with their structural reform agenda. Since the oil price shock of 2014, the GCC 2.5 countries have prepared “vision” documents and begun imple- 2.0 menting development strategies to build robust economies, create vibrant societies, and form strong nation states. The real- 1.5 ization of these overarching goals involves the structural trans- formation of their economies away from their historical de- 1.0 pendence on hydrocarbons. Transforming visions to reality involves an ambitious agenda that includes initiatives to 0.5 achieve fiscal consolidation and public sector reform, econom- ic diversification and private sector development, and human 0.0 capital development and labor market reform. Qatar Bahrain Oman Saudi UAE Kuwait Arabia Strengthening fiscal management Public finances in the GCC can be considerably strengthened as scheduled in January 2018, and Bahrain, one year late in by policy measures to diversify the revenue base while improv- January 2019. Oman has delayed the implementation of the ing the efficiency of public spending. GCC public finances are VAT to beyond 2019. The decision appears to be political, but still burdened by an over -dependence on oil revenues, inordi- accounting firms have also warned that the country’s business nately large public wage bills, costly energy and other subsidy enterprises were not adequately prepared for the VAT. Qatar systems, inefficient capital spending, and, in some cases, un- has delayed the implementation of the VAT until at least 2020, sustainable fiscal deficits. Stronger fiscal management will not while Kuwait is not expected to introduce the VAT until 2021. only improve prospects for fiscal sustainability in a global en- vironment where the long-term prospects for oil are uncertain, There are a number of options to diversify the revenue base, it would also be a positive signal for private investors about keeping in mind the need to balance revenue efforts with the government commitment to macroeconomic stability. goal of creating an enabling environment for the private sector. Countries will need to augment tax revenues to build fiscal Significant progress has been made on introduc- resilience and reduce the impact of oil price volatility on fiscal ing consumption taxes in some countries, but accounts. In this respect, there is scope within the current tax has stalled in others framework to streamline corporate tax regimes. Oman, the sole GCC country with a corporate income tax that applies to all Diversification of the revenue base is an important aspect of companies whether owned by foreigners or by nationals, raised broader diversification efforts, and part of the reform agenda the corporate tax rate from 12 percent to 15 percent in Febru- adopted by GCC countries. Tax revenues currently comprise a ary 2017. The UAE announced the potential introduction of a small part both of total revenues and of non-oil GDP among the corporate income tax in August 2015, but the authorities have GCC countries. The GCC countries had agreed in 2015 to im- not provided a timeline for the proposal. Plans to introduce a plement unified excise taxes on tobacco and tobacco products, corporate tax, at a fixed rate of 10 percent, have been recently energy drinks, and soft drinks beginning in 2017. The region- shelved in Kuwait, following criticism that the tax would put wide excise taxes would be harmonized as to rates (100 percent Kuwait at a competitive disadvantage relative to the other GCC on tobacco and energy drinks and 50 percent on soft drinks), economies. Countries may also wish to consider a business bases, and coverage. Four countries have implemented the re- profits tax, which provide a significant revenue source for gional agreement so far. Saudi Arabia and the UAE introduced some governments. In the OECD countries, they average the excise taxes in October 2017, Oman, in August 2018, and around 10 percent of total tax revenues and 3 percent of GDP. 2 Bahrain, in January 2019. Qatar and Kuwait have not an- nounced dates for the implementation of the excise taxes. Going forward, GCC countries would be well -placed to com- municate a clear policy on revenue mobilization. This would Only three countries have implemented the VAT. As with the create predictability for private sector investments while facil- excise taxes, the GCC countries agreed in 2015 to introduce a itating diversification of the revenue base. In the medium unified 5 percent VAT in 2018. The IMF had estimated the term, tax regimes in the GCC should aim to meet the goal of potential revenue from the 5 percent VAT to be significant for most GCC countries, ranging from 1.2 to 2.1 percent of GDP (Figure 17). Saudi Arabia and the UAE implemented the VAT 2/ IMF, 2016. broadening the tax base while adopting low rates that ensure Energy price subsidies, 2016 responsiveness of tax receipts to economic growth and mini- mize base shifting and arbitrage opportunities. Tax expendi- Percent of GDP tures and preferential rates, which typically have a negative effect on tax buoyancy, should be carefully considered. Since most countries in the GCC are starting from a relatively “clean 7.0 slate” in terms of establishing their non-oil tax regime, there is 6.0 considerable scope to design tax regimes that respond to coun- try specific needs. Successful tax reforms require political sup- 5.0 port, popular approval, and institutional capacity. The political 4.0 institutions in the GCC countries must unify around tax re- 3.0 form, considering that the taxation in oil -rich economies is a difficult proposition. They also need to ensure that tax 2.0 measures are supported by the necessary tax infrastructure and 1.0 administrative capacity on the part of revenue agencies and tax administrators. Effective fiscal management also requires ra- 0.0 tionalizing expenditures. UAE Oman Qatar Bahrain Saudi Kuwait Arabia Following the 2014 oil price shock all GCC countries made significant progress with energy price subsidy reform. Howev- er, considerable scope for continuing reform remains (Figure Gasoline prices, March 18, 2019 18, Figure 19, and Figure 20). In mid-2015, the UAE imple- U.S.$ per liter mented a pioneering effort to reform energy subsidies, consist- ing of monthly adjustments to the price of transport fuel and electricity tariff increases. Saudi Arabia, Bahrain and Oman 1.20 followed with similar increases in the price of transport fuel and electivity tariffs. Kuwait was the last to act and increased the 1.00 prices for high-grade gasoline by 83 percent and low-grade gas- oline by 42 percent in January 2016. Natural gas prices remain 0.80 well below international prices in the UAE, where natural gas 0.60 subsidies account for the bulk of the country’s energy subsidies. Saudi Arabia’s energy subsidy reform plan spans five years 0.40 from 2016 to 2020. Its electricity tariff increases are still limited 0.20 to high tier residential consumers. Moreover, electricity produc- ers continue to receive their fuel supply at subsidized prices. 0.00 Bahrain is increasing gas prices in phases, beginning in 2015 Kuwait Qatar UAE Bahrain Oman Saudi Arabia and culminating in 2022. Its electricity tariff increases are still Global average gasoline price = US$1.11 per liter limited to high tiers of residential consumption and to industrial and commercial users. Oman aims to cut subsidies for petrole- um and electricity by over 60 percent, but over time. Diesel prices, March 18, 2019 Efforts are also needed at rationalizing other public spending, U.S.$ per liter to ensure expenditure efficiency and value for money. GCC countries have implemented spending reductions, especially during periods of fiscal adjustment after an oil price shock. 1.20 Often, the burden of spending cuts has fallen disproportionate- ly on public investment, which has dampened growth prospects 1.00 and created other externalities. Going forward, efforts at ex- 0.80 penditure rationalization should include adoption of a medium - term fiscal framework, and policies to systematically identify 0.60 and reduce waste in operational and capital spending. Saudi 0.40 Arabia has recently established the Center for Spending Effi- ciency, which is tasked with this mandate. Wage bill reform is 0.20 an area where significant gains could be achieved, as men- 0.00 tioned in previous editions of the Monitor. GCC countries also Saudi Kuwait Bahrain Qatar Oman UAE tend to spend more while achieving less than desirable out- Arabia comes. This is typically the case in health and education spend- Global average diesel price= US$1.05 per liter ing. Aligning spending to economic outcomes and national development goals is also an important aspect of public ex- penditure reforms. Strong fiscal coordination is also essential FDI regulatory restrictiveness index, 2017 for ensuring spending efficiency. The UAE has taken some Index value, 0 = open, 1 = closed positive steps in improving fiscal coordination but a more co- ordinated approach to expenditure planning could lead to sig- nificant efficiency gains. 0.40 0.35 All GCC economies have set ambitious goals for economic 0.30 diversification. Diversification would address the over - 0.25 reliance of the GCC economies on oil and gas production and 0.20 0.15 exports, the absence of a non-oil tradable sector, the domi- 0.10 nance of the public sector, and the dependence on imports. 0.05 Openness to trade and higher FDI are integral to achieving 0.00 Bosnia and… Indonesia Lao PDR India Viet Nam Kosovo Morocco South Africa Kazakhstan Peru Kyrgyzstan Brazil Philippines Romania Cambodia Serbia Egypt Saudi Arabia Ukraine Mongolia Malaysia Costa Rica China Colombia Macedonia Tunisia Albania OECD - Average Russia Argentina Myanmar Jordan Montenegro GCC economic diversification goals, and success requires a supportive policy environment. A greater openness to foreign direct investment … Economic diversification lies at the core of efforts by the GCC countries to achieve sustainable and equitable growth and to create private sector jobs for their nationals. Within this con- text, economic diversification will have a larger impact on FDI inflows growth and employment if supported by a greater openness of Percent of GDP the economy to foreign direct investment (FDI) and to interna- tional trade. 6 FDI can boost growth by fostering competition, enhancing productivity, enabling technology transfers and diffusion, and 5 promoting knowledge.3 But, the GCC countries are not really 4 open to FDI. Saudi Arabia had the second most restrictive FDI regime among 67 countries rated by the OECD (35 OECD and 3 32 non-OECD countries) (Figure 21). Qatar caps the foreign 2 ownership of firms outside of the special economic zones at 49 percent while Kuwait bars the ownership of land by non - 1 GCC entities. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FDI inflows into the region have under-performed that of other emerging markets and developing countries. After surging in GCC Developed economies Developing economies 2015-10, FDI inflows into the GCC countries stalled in recent years, remaining below 2 percent of regional GDP in 2012-17 (Figure 22). Moreover, FDI inflows into the region were con- centrated in two countries --- 80 percent in Saudi Arabia and FDI inflows the UAE (Figure 23) --- and in three sectors --- more than 60 U.S.$ billion percent in real estate, chemicals, and petroleum --- in 2012-16. There remains substantial scope to boost FDI inflows into the region. A recent IMF staff study estimates that the GCC coun- 60 tries could have, on average, achieved potential FDI inflows of close to 4 percent of GDP in 2011-16, compared to actual FDI 50 inflows to the region of around 2 percent of GDP (Figure 24). 40 The potential FDI inflows were estimated in regressions using education, trade openness, institutional qualities (the quality of 30 the legal system), capital account openness, real economic 20 growth, and the exchange rate regime as explanatory variables. Oman, Bahrain, and Qatar were estimated to have the highest 10 potential FDI inflows, in percentage of GDP terms. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3/ WEF, 2013; World Bank, 2013 and 2008; and OECD, 2002. Saudi Arabia UAE Qatar Kuwait Oman Bahrain Potential versus actual FDI inflows Gains in non-oil GDP growth per capita from raising Percent of GDP FDI to potential, Percentage points 5 1.2 4 1.0 3 0.8 0.6 2 0.4 1 0.2 0 Kuwait Saudi UAE Qatar Bahrain Oman 0.0 Arabia UAE Oman Saudi Arabia Kuwait Qatar Bahrain Actual FDI inflows Potential FDI inflows Raising FDI inflows to potential could boost real non-oil per wholesale and retail trade; the UAE, in sectors selected by a capita GDP growth by one percentage point in the GCC coun- committee of the seven emirates; Qatar, across all sectors sub- tries. The largest gains in per capital non-oil growth could be ject to the approval of the Ministry of Economy and Com- realized by Bahrain, Qatar and Kuwait (Figure 25). merce; and, Oman, in companies with a capital of at least OMR 500,000 (U.S.$129,870) and on the recommendation of The GCC countries have taken several steps in recent years to the Ministry of Commerce and Industry. attract FDI, including by offering incentives to foreign inves- tors. Kuwait’s FDI incentives, offered under a new FDI law, … and to international trade will support eco- include tax benefits, customs duties relief, land and real estate nomic diversification efforts allocations, and permission to recruit foreign labor. Oman ’s FDI incentives include: a five-year renewable tax holiday, sub- While the GCC countries are more open to trade than to FDI, sidized plant facilities and utilities, and customs duties relief non-tariff barriers restrict their growth potential as evidence on equipment and materials for the first ten years. shows that greater trade openness is linked to higher per capita income.4 Tariffs are relatively low (Figure 26). The Customs The GCC countries also continue to create free trade zones. Union Agreement signed in 2003 established a common GCC Saudi Arabia has announced plans to build new economic external tariff of 5 percent on most imported merchandise. The cities. The UAE has established more than 20 special eco- Most Favored Nation (MFN) applied tariff rate dropped to 4 nomic zones, where foreigners may own up to 100 percent of percent in 2016, from 8.2 percent in 2000 -04. However, non- the equity in an enterprise, have 100 percent import and ex- tariff barriers remain prevalent in several GCC countries port tax exemption, and repatriate 100 percent of capital and (Figure 27). profits. Kuwait opened a free trade zone at Shuwaikh port in 1999, which allows for 100 percent foreign ownership and Expanding and broadening their export bases can help the tax exemptions, and is in the process of creating two new GCC countries make their economies more productive. zones. Oman has created three free -trade zones at strategical- Trade in goods and services have expanded robustly in the ly located ports. Bahrain ’s Khalifa bin Salman Port has a free GCC, growing at more than the rate of GDP in 2000 -17 transit zone to facilitate the duty -free import of equipment (Figure 28). But GCC exports consist predominantly of oil and machinery; its international investment park gives for- and gas (Figure 29). And imports, both of consumption and eign-owned firms the same investment opportunities as are investment goods, are made necessary by the lack of domes- open to Bahraini companies. tic production and are fueled by oil and gas receipts. Non - oil exports as a percentage of non -oil GDP have doubled The GCC countries expect to attract more FDI to the region by from 2000 to 2017, but they are concentrated in downstream loosening restrictions on the foreign ownership of firms. Ku- industries that capitalize on hydrocarbon resources and sub- wait passed the Direct Investment Promotion Law in 2015 al- sidized energy --- refined hydrocarbons, petrochemicals, lowing a 100 percent foreign ownership of a commercial enti- and aluminum. ty. Bahrain allowed a 100 percent foreign ownership of firms in several sectors in 2016. In 2018, Saudi Arabia disclosed plans to allow 100 percent foreign ownership of firms in 4/ Cerdeiro and Komaromi, 2017; Feyrer, 2009; Frankel and Romer, 1999. As they have with FDI, the GCC countries have scope to boost non-oil exports. The same IMF staff study estimated that the Tariff rate, applied, simple mean, all products GCC countries, on average, could have posted non -oil exports Percent of close to 20 percent of non-oil GDP compared to actual non- oil exports of about 15 percent of non-oil GDP (Figure 30). Potential non-oil exports were estimated in regressions using 14 population size (measure of country size), per capita income (level of economic development), the real exchange rate 12 (competitiveness), average tariffs (trade openness), gross ter- 10 tiary enrollment (human capital), inflation (macroeconomic 8 stability), and fixed telephone lines (infrastructure) as explana- 6 tory variables. Oman and Bahrain were estimated to have the 4 highest potential non-oil exports in the group, in percentage of 2 GDP terms. 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 Raising non -oil goods exports to their potential could boost real non-oil per capita GDP growth by 0.2 -0.5 percentage Saudi Arabia UAE Qatar point. The highest gains in per capita non -oil GDP growth Kuwait Oman Bahrain World could be posted by Kuwait and Saudi Arabia (Figure 31), both on goods exports, by around 0.3 percentage point, and on total exports of goods and services, by around 0.5 per- centage point. Non-tariff measures Number of measures initiated as of March 2018 For which, creating a supportive policy environ- ment is critical 1200 To raise FDI and non-oil exports to their potential levels, the GCC authorities would have to reform the set of policies and 1000 regulations that govern foreign investment and international 800 trade. There remain restrictions to foreign entry in areas out- side of special economic zones in many GCC countries. Many 600 non-tariff measures restrict trade even as average tariff rates have edged down below world averages. The GCC countries 400 must dismantle the regulatory and administrative barriers that 200 deter investment and trade and foster an enabling business en- vironment for private enterprise. 0 Sanitary and Phytosanitary Technical barriers to trade The openness to foreign entry outside of the special economic Oman Kuwait UAE Qatar Bahrain Saudi Arabia zones varies widely among the GCC countries. Restrictions on 5 the foreign ownership of land remain strict in all GCC coun- tries and are a potential impediment to FDI. Consistency in the 4 interpretation and application of rules pertaining to foreign investment is not easily assured, hence reforms to the legal and 3 judicial systems of the GCC countries remain necessary. And, while the GCC countries have made progress in improving 2 governance, with the passage of new procurement laws and creation of anti-corruption agencies, they also need to focus 1 their efforts on implementation and enforcement. 0 Large export gaps are associated with a high share of non - Safeguards Anti-dumping tradables in the non-oil economy, the prevalence of non -tariff Oman Kuwait UAE Qatar Bahrain Saudi Arabia barriers, and a sub-optimal business climate. Reflecting a heavy domestic orientation, a high share of non -tradables in the non-oil economy is a by-product of public sector domi- nance. Reductions in dominance of the public sector in the business entrepreneurship, including in the non-oil industries, economy --- including through the privatization of state - and in tradable goods. Non-tariff trade barriers deter trade, en- owned enterprises, the use PPPs, and reductions in the size of courage inefficient production, and stifle innovation. Disman- government --- would encourage private sector activity and tling non-tariff barriers --- including export taxes, subsidies, GCC: Trade in goods and services GCC: Exports, by product category Index of constant U.S.$ values, 2000 = 100 Percent of total goods exports 300 250 200 150 100 50 0 2000 2002 2003 2004 2006 2007 2008 2010 2011 2012 2014 2015 2016 2001 2005 2009 2013 2017 2018 Trade in goods and services GDP Potential versus actual non-oil goods exports Gains in non-oil GDP growth per capita from raising non Percent of non-oil GDP -oil exports to potential, Percentage points 25 0.4 20 0.3 15 0.2 10 5 0.1 0 Qatar UAE Saudi Kuwait Bahrain Oman 0 Arabia UAE Bahrain Oman Qatar Saudi Kuwait Actual non-oil goods exports Potential non-oil goods exports Arabia quotas, prohibitions, and voluntary restraints and import quotas, and physical capital, oil rents have been channeled into an ex- prohibitions, licensing, cumbersome customs procedures, and panding public-sector workforce, and generous wage, subsidy high administration fees, as well as behind-the-border measures and transfer benefits, in turn depressing the long -term produc- --- would promote trade, encourage efficient production, and tivity potential of the economies. foster growth. And enhancing the business climate, including by reforming regulation and improving the quality of the legal As the Special Focus section of this Monitor elaborates, human system, would allow private firms to thrive and explore oppor- capital development and labor market reforms are critical in tunities in international trade. addressing youth unemployment, improving productivity and boosting competitiveness to eventually achieve the envisioned And deepening labor market and education re- knowledge-based and private sector-driven economies. En- forms are key hancements to education, skills training and health as well as labor market reform are vital for sustaining a private sector -led A major challenge facing the GCC countries is increasing pri- growth model that creates high quality and productive jobs vate-sector led job creation for nationals, as the volatility of oil sought for by GCC nationals. The region’s human capital po- prices and the global shift to cleaner energy have rendered the tential is insufficiently tapped by distortionary policies that rentier social contract unsustainable. Instead of being used to steer the labor force into public sector employment and leave build “above ground wealth” through investments in human the private sector economy overly reliant on foreign labor. The GCC countries must complement interventions that improve education outcomes with reforms that remove the distortions Unemployment rates, 2016-17 present in a highly segmented labor market with high reserva- Percent tion wages. The GCC governments have introduced workforce nationaliza- 25 tion measures to address high rates of unemployment among their nationals. The current policy package for reducing de- 20 pendence on foreign workers and raising employment rates for citizens mandates quotas on the number or percentage of citi- 15 zen workers in a firm, exacting levies on expatriate workers and their employers, and reserving certain jobs or workplace 10 functions to nationals. However, unemployment remains high, especially among the youth. Youth unemployment is most 5 acute in Saudi Arabia and Kuwait. Unemployment in 2016 -17 in the 15-24 age group was estimated at 25 percent in Saudi 0 Arabia and 16 percent in Kuwait, well ahead of the global av- Qatar Bahrain UAE Oman Kuwait Saudi erage of 12.6 percent (Figure 32). There is also a pronounced Total 15-24 Arabia gender dimension to the problem. In Saudi Arabia, the female youth unemployment rate is 46.3 percent, almost three times the male youth unemployment rate of 17.4 percent. success of workforce nationalization programs in the GCC Workforce nationalization policies have had mixed results. In countries. First, generous subsidies to nationals --- oil revenue some cases, quotas have been overly ambitious, for example in is distributed to citizens as subsidies to households ---increase Qatar where the goal is for 50 percent of workers in the energy the reservation wages of workers and reduce their participation and industrial sectors and 20 percent of workers in the other in the labor force. Second, significant wage gaps between gov- sectors to be nationals by 2020. However, Qataris comprise ernment and private industry skew the supply of labor toward only 5 percent of the workforce. In the UAE, where the Na- the public sector where wages are generally higher, benefits tional Agenda 2021 targets a high “Emiritization” rate, only are more comprehensive and generous, job security is greater, 3.4 percent of Emiratis work in the private sector, including in and work weeks are shorter. And third, workers lack the incen- state-owned enterprises. Penalties on firms for non-compliance tive to invest in the skills needed for private industry because with targets, and levies on expatriate workers, measures used risk-free jobs in government make the risk-adjusted returns to in Saudi Arabia, have led to firms relying on a smaller work- education very high. force and expatriate departures at a time when the country is aiming to accelerate private sector economic activity. On the Therefore, GCC governments must focus their efforts on im- other hand, reservation of some jobs (the UAE requires large proving education outcomes to equip GCC nationals with the firms to hire nationals as health and safety officers and for data skills required by the private sector, today and in the future. entry duties, Saudi Arabia has reserved a number of service Human capital formation is the accumulation of the sector jobs for nationals) has achieved positive impacts in knowledge, skills and health over a lifetime and is a key con- terms of increasing employment of nationals. tributor to the potential growth of an economy. Investments in education have become increasingly important not just to re- The literature measuring the impact and effectiveness of na- duce the skills gap that exists today but also to cope with the tionalization policies in the GCC countries is limited5. Some continuously changing nature of work evolving from rapid studies assessing Saudi Arabia’s Nitaqat program6 indicate that technological change. The next section analyzes the progress while there was an initial increase in employment of nationals, of human capital formation in the GCC and provides various the higher costs of training Saudis and the higher wages they strategies to address challenges related to improving education, received relative to expatriate workers negatively impacted health and labor market outcomes. firm profitability which may have resulted in firm closures leading to an overall decrease in private sector employment. 7 Other studies have pointed to the potential for reduced produc- tivity and lower foreign investment as a result of Nitaqat. 8 5/ TBC with more info on publicly available assessments. 6/ IMF, 2018b. The underlying causes of unemployment relating to economic 7/ Peck 2017; Koyame-Marsh, 2016. structure and labor market conditions may have limited the 8/ Ramady, 2013. In focus Human Capital and Economic Growth in the GCC Countries This Special In-Focus section describes the World Bank’s Hu- financial assets. In high-income countries, the share of human man Capital Project and presents the GCC’s score on the Hu- capital wealth is about 66 percent of their total wealth, but it is man Capital Index (HCI) relative to comparable countries. It only 41 percent in low-income countries. In the GCC, the share provides a summary of the challenges facing the formation of of human capital in total wealth ranges from 24 percent in Ku- human capital in the GCC countries and suggests different wait to 58 percent in Bahrain.3 strategies to accelerate human capital formation to achieve economic diversification and sustainability. Investments in human capital have become increasingly important, with the nature of work evolving in response to rapid technological change. By one estimate, two-thirds of all Human capital and economic jobs are susceptible to automation in the developing world. 4 In addition, labor markets are demanding workers with higher - growth order cognitive, socio-emotional, and behavioral skills.5 Economic growth depends on human capital, physical capi- tal, and factors affecting the productivity of both. Human The human capital project: A capital consists of the knowledge, skills, and health that people accumulate over their lives to make them more productive. measure of potential productivity When governments make investments in human capital, they equip the workforce to better utilize the physical capital. Coun- To state the case for investing in people, the World Bank ’s tries that have invested consistently over time to improve their Human Capital Project includes an index that captures the human capital have observed tremendous gains (for example, Singapore, Ireland, Finland, and South Korea). Studies have shown that the quality of education (learning) correlates 1/ Gertler, Heckman et al. 2014. "Labor Market Returns to an Early Childhood strongly with economic growth; that psychosocial stimulation Stimulation Intervention in Jamaica," Science 344(6187): 998-1001. in a child’s early years can raise his or her adult income by up 2/ Hanushek and Woessman. 2015. The Knowledge Capital of Nations: Educa- to 25 percent; and that one additional year of schooling raises tion and the Economics of Growth, MIT press. an individual’s earnings by 8 percent to 10 percent.1,2 A study 3/ Lange, Glenn-Marie, Quentin Wodon, and Kevin Carey, eds. 2018. The Changing Wealth of Nations 2018: Building a Sustainable Future. Washington, of the wealth of nations found that human capital, measured as DC: World Bank. the value of earnings over a person’s lifetime, was the most 4/ World Bank. World Development Report 2016: Digital Dividends. important component of wealth globally compared to the other 5/ World Bank. 2019. World Development Report 2019: The Changing Nature components, such as produced capital, natural wealth, and net of Work. Washington, DC: World Bank. amount of capital (in knowledge, skills, and health) a child Kuwait) to 9.6 years (in Bahrain). This is the key fac- born today could expect to attain by the age of 18. tor lowering their scores (Table 1). The Human Capital Index (HCI) has several components: a) 3.Adult survival rate: About 91 percent of children age survival, indicating a child’s likelihood of surviving to the age 15 in Saudi Arabia and Oman will survive to 60, 92 of 5; b) learning-adjusted school years, or the quantity of edu- percent in Kuwait, 93 percent in Bahrain and U.A.E, cation a child can expect to have had by the age of 18, com- and 94 percent in Qatar. These outcomes are good but bined with its quality (as children in some countries learn far can be improved by reducing premature deaths from less than in others in a similar amount of time); and c) health, transport injuries and non-communicable diseases. which uses the rate of stunting of children under the age of 5, and the adult survival rate, or proportion of 15-year-olds who The resulting scores for the GCC countries are relatively will survive until age 60. low (Table 2). Bahrain has the highest score of 0.67, ranking 47 in the world, followed by UAE (0.66, 49), Oman (0.62, 54), The components of the index are combined to reflect their con- Qatar (0.61, 60), Saudi Arabia (0.58, 73), and Kuwait (0.58, tribution to worker productivity. The index ranges between 0 77). That means that a child born today in the GCC will only and 1. A country in which a child born today can expect to attain between 58 percent and 67 percent of his/her full health, achieve full health—with no stunting and 100 percent adult learning, and potential productivity. survival—and full education—14 years of high-quality school- ing by age 18—will score a value of 1. A score of 0.70 there- HCI scores in GCC countries are higher than their regional fore signals that, as a future worker, the productivity of a child peers but lower than their economic peers (Figure 1). born today is 30 percent below what it could be with complete Scores for human capital in the GCC countries rank top in the education and full health.6 MENA region and are higher than the MENA average of 0.56. Over the last decade, the GCC countries have been doing bet- HCI scores in the GCC ter, overtaking Jordan, Lebanon, and Tunisia in international standardized reading and math tests. However, the GCC coun- GCC countries vary significantly across the Human Capi- tries do not compare favorably with countries such as South tal Index components7: Korea, Germany or Singapore, which have similar income lev- els and significantly higher HCI scores. Instead, the scores in 1.Survival to age 5: 99 % of children born today in the the GCC countries are similar to those in less wealthy nations, GCC countries will survive to school age. This reflects like Mexico, Turkey, and Thailand. As shown in Figure 2, the tremendous investments made in maternal and child some lower income countries have higher HCI scores than the health over the last few decades. GCC countries, emphasizing the importance of ensuring value for money in public spending. 2.Learning-adjusted Years of School (LAYS): In the GCC, school children will finish 12.4 to 13.3 years of schooling, but only learn the equivalent of 7.6 (in Accelerating human capital formation in the GCC would 6/ Gatti, Roberta V.; Kraay, Aart C.; Avitabile, Ciro; Collin, Matthew Edward; take a lifelong approach Dsouza, Ritika; Dehnen, Nicola Anna Pascale. 2018. The Human Capital Project. Washington, D.C.: World Bank Group. 7/ Stunting is very low in the GCC and not measured except in Oman and There are some limitations to the HCI. First, it projects the therefore was not included in the HCI. future productivity of those who are born today (the “flow”) and does not take into consideration the current workers, or young people ready to enter the labor market (the “stock”). The human capital index: international benchmarking Second, it stops at the end of school at age 18 and not be- Productivity relative to frontier yond. Therefore, to accelerate the pace of human capital for- mation, GCC countries need to address the stock and flow of current and future workers, and to address factors that affect 1.0 human capital beyond those measured by the index. Figure 3 represents a framework for a lifelong approach to human cap- ital formation. 0.8 BHR UAE The center contains children aged 0 to 18 years. The next QAT sphere, the age group 0 to 25 years, when countries need to: 0.6 OMN KWT invest in early child development (ECD), improve tertiary edu- SAU cation outcomes, modernize vocational training, reduce transport injuries, and reduce risk factors for non - 0.4 communicable diseases. The outer sphere represents the age group above 25 years old, when strategies are needed to en- 0.2 courage lifelong learning, skills development, and address la- 6 8 10 12 bor market distortions; also to encourage the participation of women in the labor force, and to improve social safety nets and the use of technologies. These strategies need to focus on im- proving value for money in human capital investment and The human capital index strengthening governance, including the regulatory and institu- Distribution by countries’ income group tional frameworks. Many of these strategies will require the collaboration of more than one sector, and a whole-of- government ap- proach for policy coordination and effective implementa- High income tion. Private sector partnerships, where appropriate, are critical Upper middle as governments often do not have adequate financial and tech- income nical resources to implement these strategies. Governments Lower middle need community engagement strategies to gain support for income reforms. Partnering with international organizations allows them to benefit from global best practice through informed Low income policy development. 0.0 0.2 0.4 0.6 0.8 1.0 Challenges facing human capital HCI formation in the GCC: Education, health and labor markets A life-long approach to human capital: realizing the full potential of a productive population A number of challenges stand in the way of the accumulation of human capital in the GCC countries. As illustrated by the index, the most pressing relate to learning outcomes and adult A Whole-Government Approach survival rates—both exacerbated by the limitations of the la- • Life-long learning • Child Survival >25 years bor market. Family/Community Engagement • Learning Adjusted • Skills development International Organizations Years of Schooling (0-25 years) • Road Traffic Injuries • Stunting • NCDs and their Risk Learning outcomes are poor with few school- HCI: 0-18 factors • Adult Survival children reaching levels of basic proficiency years • Labor Market Supply • Early Child • Labor Market Development Despite substantial public investments in education, stu- • Tertiary Education Distortions • Female labor dents across the GCC demonstrate lower levels of learning outcome • Improving Value participation • Vocational Training than students in other countries of similar income levels. • Road Traffic Injuries for Money • Social Safety Nets • Strengthening • Disruptive The Trends in Mathematics and Science Study (TIMSS) and • Risk Factors of NCDs Governance Technology Progress in International Reading Literacy Study (PIRLS) are Private Sector Partnership two common international assessments used to measure the learning of school-age children. On these, all six GCC member TIMSS grade 4 mathematics performance and GDP per countries have scored lower than other high-income countries (Figure 4). On the grade 4 mathematics assessment, for exam- capita, 2015, Percent of students reaching the 'low' ple, the proportion of students achieving the lowest of the four international benchmark international benchmarks8 ranged from 23 percent in Kuwait to 72 percent in Bahrain—well below the international median of 100 93 percent. By contrast, in high-performing countries like Ja- 90 pan, Singapore, the Netherlands, and the Republic of Korea, 80 Bahrain the proportion of students reaching the ‘Low’ international 70 72 Qatar benchmark exceeds 99 percent. The trends were similar in oth- 60 United Arab 65 er assessed subjects (science and reading), as well as at grade Oman Emirates 50 60 8—where GCC students performed closer to, but still below, 40 68 Saudi Arabia the international average (Figure 5). 30 Kuwait 43 20 23 Although school enrollment rates are high, when adjusted 10 by the quality of education that children receive, the effec- 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 tive educational attainment in the GCC is significantly GDP per Capita, PPP (current international $) lower. In recent decades, GCC countries have made great strides in expanding access to schooling and ensuring gender parity. Yet schooling is not the same as learning. 9 As shown above, many children who are enrolled in school—more than Percentage of students in GCC countries reaching half in some countries—fail to attain minimum proficiency in the ‘low’ international benchmark in TIMSS 2015 basic foundational skills, such as reading and math. After ad- justing for learning outcomes, the average educational attain- and PIRLS 2016, By subject ment in the GCC countries declines from 13 expected years of school to 9 learning-adjusted years of school (Figure 6). 10 And 100 gender parity in enrollment turns into gender disparities in 96 80 72 93 72 95 75 73 73 7270 76 69 effective schooling, with boys trailing girls in most GCC 65 68 67 84 84 666368 60 6164 63 59 countries. An 18-year-old male is expected to complete about 60 52 51 43 48 49 49 12.6 years of schooling on average across the GCC countries; 37 40 25 34 however, this corresponds to only 8.3 learning -adjusted years 23 20 of schooling. For females, the 12.9 years of expected school- ing translate into only just slightly more, 8.9 years of learning - 0 adjusted schooling. TIMSS 2015 TIMSS 2015 TIMSS 2015 TIMSS 2015 PIRLS 2016 Grade 4 Grade 4 Grade 8 Grade 8 Grade 4 Substantial learning gaps between groups exist in GCC Math Science Math Science Reading countries. While nearly half of GCC students—on average— Bahrain Kuwait Oman Qatar Saudi Arabia UAE Intl. Median fail to gain the minimum understanding of math, science, and reading (Figure 5), the learning gaps between the top - and bot- tom-performing students are vast. Those in the 75th TIMSS percentile score on average 120 to 150 scale points higher than Learning-adjusted years of schooling in GCC countries those in the 25th percentile in grade 4 math (Figure 7a). This By gender gap is equivalent to approximately two TIMSS international benchmark levels (that is, the worst quarter of performers score below the ‘Low’ international benchmark, while the best quar- 14 ter score near the ‘High’ international benchmark). The top quarter of students in Bahrain are on par with average students 12 in Canada, while the bottom quarter of Bahraini test -takers are 10 8 6 8/ The ‘Low’ international benchmark on TIMSS and PIRLS corresponds to 4 students having acquired the basic minimum knowledge expected of that grade level. (At the second-lowest ‘Intermediate’ benchmark, test-takers can demon- 2 strate the ability to apply that knowledge in a variety of situations.). 9/ World Bank. 2018. World Development Report 2018: Learning to Realize 0 Education’s Promise. Washington, DC: World Bank. http:// Bahrain Kuwait Oman Qatar Saudi United Arab www.worldbank.org/en/publication/wdr2018. Arabia Emirates 10/ World Bank. 2018. Human Capital Project. http://www.worldbank.org/en/ Total Boys Girls publication/human-capital. TIMSS grade 4 mathematics performance gaps in GCC countries, By a. performance quartile (difference in TIMSS scale points) and b. gender 150 50 120 40 90 30 60 20 30 10 0 0 Bahrain Kuwait Oman Qatar Saudi United Bahrain Kuwait Oman Qatar Saudi United Arabia Arab Arabia Arab 75th - 25th Percentile Emirates Girls - Boys Emirates on par with those in Indonesia. The gender gap is also signifi- The credentials—a diploma, degree, or certificate—was need- cant, with boys significantly underperforming compared to ed more than the skills that could have been gained as part of girls. In grade 4 math, male students in Saudi Arabia, Oman, that education. As a result, links between education credentials Bahrain, and Kuwait scored significantly below their female and skills are weak in modern labor markets in the GCC.12 In counterparts (Figure 7b). In grade 4 reading, the gender gaps addition, there has been little pressure placed on educational are even larger and significant in all GCC countries. The dif- institutions to ensure that graduates possess skills relevant to ference between boys’ and girls’ test scores in Saudi Arabia the labor market. This results in a “credentialist equilibrium,” and Oman are the largest in the world. where public sector employers communicate their strong de- mand for credentials, while the private sector communicates Education outcomes are not closely linked to weak signals for relevant skills. Students and families respond labor market needs to these market signals by focusing more on the credential and less on the skills and competencies that these credentials A recent World Bank report identified four tensions hold- should represent (Figure 8).13 As a result, the outcomes pro- ing back education systems in many MENA countries.11 In duced by the education system—reflected in the graduates’ among the complex interactions, behavioral norms, and ideo- skills—can bear little resemblance to the demands for skills logical differences present in the region are four sets of tensions being communicated by private sector employers. lying between credentials and skills, discipline and inquiry, control and autonomy, and tradition and modernity. These are Another tension—between discipline and inquiry—is evi- embedded in the region’s history, culture, and political econo- dent in pedagogical and curricular norms predominant in my. They define social and political relations and shape educa- GCC education systems. Public school instruction in GCC tion policy; often the impact they have on society, school, and countries tends to emphasize rote memorization over critical the classroom prevents national education systems from evolv- thinking and other “21st century skills.” According to TIMSS ing to deliver the skills that prepare students for their future. 2015 data, roughly half of grade 8 science students in the GCC (ranging from 42 percent in Qatar to 57 percent in Saudi Ara- The tension between credentials and skills leaves countries bia) reported being asked to memorize specific facts and prin- stuck in a “credentialist equilibrium,” which emphasizes ciples in nearly every lesson. By comparison, the international the importance of credentials over skills and is reinforced average for this indicator was 30 percent, while in top - by the strong historical preference for public sector em- performing systems only 10 percent of students reported mem- ployment. In many GCC countries, public sector employment orization as being a common instructional practice (Figure 9). was guaranteed for anyone who obtained enough credentials. 12/ Assaad, Ragui, Caroline Krafft, and Djavad Salehi-Isfahani. 2017. “Does the Type of Higher Education Affect Labor Market Outcomes? Evidence from 11/ World Bank. 2018. Expectations and Aspirations: A New Framework for Egypt and Jordan.” Higher Education 1–51. Education in the Middle East and North Africa. Washington, DC: World Bank. 13/ Salehi-Isfahani, Djavad. 2012. “Education, Jobs, and Equity in the Middle https://openknowledge.worldbank.org/handle/10986/30618. East and North Africa.” Comparative Economic Studies 54 (4): 843–61. GCC countries are stuck in a “credentialist Percentage of grade 8 students asked to memorize equilibrium” science facts and principles for every lesson or almost every lesson, 2015 Education system Strong supply 60 57 53 49 Strong of credentials 50 45 44 42 demand for credentials 40 30 30 Weak Private 20 14 14 demand for 11 11 10 10 employers 10 skills 0 UAE Canada Intl. Median Bahrain Saudi Arabia Singapore Oman Ireland Sweden New Zealand Qatar Kuwait United States Strong Youth and Public demand for families employers credentials Source: Salehi-Isfahani Meanwhile, the third tension, between control and autono- spans. Despite these advances, adult mortality and morbidity my is usually associated with the debate on decentralization remain relatively high compared to OECD countries. Adults of services. The struggle in the balance of power between cen- die at a rate of 2.17 per every 1,000 people and, for every tral ministries, regional offices, and schools is apparent in sev- 100,000 people, almost 19 years are lost due to ill health, eral GCC countries. Saudi Arabia, for example, has made initial disability, or early death—all years that could have contribut- steps in empower local education directorates, but more sub- ed to the overall productivity, income, and growth of the stantive decentralization of decision-making control remains GCC economies. elusive. The goal of decentralization is typically to improve governance by fostering autonomy, accountability, and respon- The main drivers of mortality and morbidity in the GCC siveness to local conditions and needs. These in turn can im- are noncommunicable diseases (NCDs) and transport inju- prove the quality of service delivery and student learning out- ries (TIs). After tackling—and controlling—communicable comes. However, a long history of centralized decision making diseases and maternal and perinatal health complications in in GCC countries makes it difficult to find the right balance the past half century, NCDs are the leading cause of death, between control and autonomy to ensure that education systems accounting for 71.5% of deaths (Table 3). The top cause of produce graduates with skills aligned to local needs. death in the GCC is cardiovascular disease, as it is elsewhere in the world. Other leading causes of death include cancers, Relatedly, the fourth tension between tradition and moder- diabetes and kidney disease, neurological disorders and chron- nity holds back some key education system reforms. While ic respiratory disease.14 In addition, 12 percent of deaths on modernization has taken place in terms of physical infrastruc- average are caused by transport injuries, a rate that is among ture and school equipment, the learning process itself remains the highest in the world and is substantially higher than in very traditional in most GCC countries. Prevailing societal OECD countries. views on the primary purpose of education—to succeed in ex- ams that allow students to obtain degrees and credentials— Rising trends of NCDs and transport injuries are reflective remain rooted in the traditions of the 20th centuries and before. of changes in both modifiable and non-modifiable risk fac- Modern methods of teaching and learning, which emphasize tors. The leading modifiable risk-factors of NCDs and their critical thinking and inquiry, and the development of key 21st metabolic precursors (high blood pressure, high cholesterol century skills (such as problem solving, collaborative team- and glucose levels, and obesity) include tobacco use, unhealthy work, socio-emotional, and digital skills) remain out of favor diet, and a lack of physical activity. Diets high in sugar and in many schools. salt, and low in vegetables and fruit, as well insufficient physi- cal activity, are leading risk factors for cardiovascular diseases Despite improvement, adult mortality and mor- and diabetes. Tobacco use, including shisha, is a leading risk bidity in GCC countries remain relatively high. factor in chronic respiratory disease (CRD), cancer, and neuro- logical diseases, such as strokes (Table 4). These rates are In 2016, average life expectancy at birth in the GCC countries was about 76 years, an increase of 46% in just over five decades. Growing incomes and increased access to 14/ Institute of Health Metrics and Evaluation 2017. Global Burden of education and health care have all contributed to longer life Disease Study. Percentage of total deaths caused by NCDs and TIs alarmingly high among youth. In Kuwait, Bahrain, U.A.E., and form of productivity-losses, fewer days worked, and absentee- Oman, between one third and one half of young student are ism. Complications resulting from cardiovascular diseases, either overweight or obese.15 Unsafe driving has resulted in chronic cancers, diabetes, and transport injuries can all lead to some of the highest transport injury rates in the world. reduced productivity and ultimately a decrease in national in- come. Health expenditure has already grown substantially in the The high burden of NCDs and transport injuries is nega- region and, although spending per capita and as a percentage of tively affecting human capital, with the potential to increase GDP are below OECD averages, if increases continue, they will pressure on public finances and heighten economic stress. have an impact on national economies. Human capital potential and economic output can be affected in many ways, most importantly by: a) reducing the quantity of Poor human capital outcomes, combined with a labor through the premature death of working age individuals or unique labor market, affect the ability of GCC cit- their early retirement, and b) reducing the quality of labor in the izens to find productive jobs in the private sector. The unique features of labor markets in GCC countries 15/ Kaneda, T and El-Saharty, S. (2017). Curbing the Noncommunicable Dis- ease Epidemic in the Middle East and North Africa: Prevention Among Young make it even more difficult for citizens to find jobs in the People IS the Key. The Population Reference Bureau. Washington, DC. private sector. Low human capital outcomes adversely affect led to nationals queueing for public sector jobs. A survey in Female labor force participation rates are low, given 201620 found that 70 percent of GCC youth preferred to secure public sector jobs. country income, Percent of female population ages 15+ Despite girls outperforming boys in many dimensions of educational achievement, female labor force participation 80 is low and female employment outcomes are poor (Figure 70 10). Strong educational achievements among girls do not trans- 60 QAT late into strong employment outcomes, raising the issue of un- 50 tapped human capital.21 Among more than 60 countries that KWT participated in the TIMSS, the six GCC countries had the larg- 40 UAE BHR est gender disparities in student achievement, with girls signifi- 30 OMN cantly outperforming boys. Female labor force participation of 20 SAU 22 percent among 15+-year-olds in the KSA and 30 percent in 10 Oman are particularly low relative to 60 percent in the OECD 0 countries. Only Qatar’s female labor force participation rate of 0 20000 40000 60000 80000 100000 120000 58 percent is close to the OECD average. Women who work in GDP PER CAPITA (2017) the GCC are more likely to engage in low productivity activi- ties, be unpaid family workers, be restricted to relatively low - paid occupations and sectors and earn significantly less than similarly qualified men. productivity and employability. Governments have legacy sys- tems that allow the liberal entry of foreigners into private sector Recent surveys22 have shed light on why female labor force jobs, while virtually guaranteeing employment to nationals in participation is low in GCC countries. Among the top four government jobs thus creating strong disincentives for nationals barriers are: (i) “double burden” syndrome (women balancing to seek employment in the private sector, where most new jobs work and domestic responsibilities) (29 percent); (ii) lack of are likely to be created. appropriate infrastructure (for example, transportation and oth- er women-only facilities) (28 percent); (iii) lack of pro -family Liberal admission policies–regulating entry into the coun- public policy or services (such as child care) (26 percent); and try, exit, residency, and work permits for non -citizens–have (iv) family/social expectations that women should not work led foreigners to enter GCC countries in large numbers. In (22 percent).23 While the “double burden” syndrome and the Qatar and the UAE, foreigners make up about 90 percent of the lack of pro-family public policies or services are present in total population, and even in the KSA, foreigners make up many countries around the world, they are more pronounced in more than 30 percent of the total population. These expats per- GCC countries. Moreover, the absence of the infrastructure for form 75 percent of all private sector jobs.16 including women in a company or firm, and the family/social expectations placed on women, are particularly acute in GCC Public sector employment has crowded out private sector countries relative to OECD countries. jobs for nationals. In Saudi Arabia, for example, about 35 percent of employment is in the public sector; in Kuwait, more The GCC labor market is also characterized by a skills than a quarter; and in Qatar and the UAE, about 20 percent.17 mismatch. Employers in the GCC have reported that educa- In contrast, public sector employment as a percentage of total tional outcomes are not aligned with labor market needs. Ac- employment is about 18 percent in the OECD; 15 percent in cording to the World Economic Forum’s Executive Opinion U.S.A; 16 percent in the UK; 11 percent in Germany; and 12 Survey, more than 50 percent of employers in Qatar and UAE percent in Turkey.18 Public sector wages are also relatively say they cannot easily find skilled workers; about 45 percent in generous, making private sector employment unattractive for Bahrain; and about 38 percent in Kuwait and KSA.24 Another nationals. On average, public sector wages are between 180 recent study found that only 29 percent of employers thought and 250 percent of private sector wages in the KSA, Qatar, Bahrain, and Kuwait.19 This public-private wage disparity has 20/ SDA’A Burson-Marsteller Arab Youth Survey. 21/ World Bank (2019) “Expectations and Aspirations: A New Framework for Education in the Middle East and North Africa” Overview Booklet. World 16/ IMF (2014) “Labor Market Reforms to Boost Employment and Productivi- Bank, Washington, DC. ty in the GCC-an update,” IMF, Washington, DC. 22/ A study which surveyed over 550 male and female middle and senior 17/ World Bank. 2013. Jobs for Shared Prosperity: Time for Action in the managers from public-, private-, and social-sector organizations points to some Middle East and North Africa. Washington, DC. key barriers for women. 18/ OECD. Stat. Government at a Glance - 2017 edition: Public employment 23/ Ellis, Tari, Chiara Marcati, and Julia M. Sperling (2015) “Promoting gen- and pay. der diversity in the Gulf” McKinsey Quarterly, McKinsey & Company. 19/ Tamirisa, Natalia T., Christoph Duenwald (2018) “Public wage bills in the 24/ WEF (2017) “The Future of Jobs and Skills in the Middle East and North Middle East and Central Asia” IMF, Washington, DC. Pay differentials between Africa: Preparing the Region for the Fourth Industrial Revolution” Geneva, public and private sectors in the GCC do not control for skills and education. Switzerland. that the education system in their country prepared students Well-targeted health and nutrition interventions are criti- with the right technical skills for the job.25 cal to ensure the cognitive development of all children in the first months and years of life. These include programs that provide access to prenatal and neonatal health services to Opportunities for accelerating all mothers and young children, reduce malnutrition and stunt- ing among the vulnerable populations, and ensure universal human capital formation immunizations. Childhood stunting and mortality—two key elements measured by the Human Capital Index—are com- The GCC countries have developed ambitious Vision programs pletely preventable. Extending existing programs to cover the that have strategies, programs and projects to improve human most marginalized populations is a straightforward way to pre- capital such as the Vision Realization Program on Quality of vent the loss of human capital in the early years of life. 27 Life in Saudi Arabia’s Vision 2030; the “First Rate National Education System” priority of the UAE Vision 2021; the Hu- The role of parents and communities is equally important man Development pillar in the Qatar National Vision 2030; and in ensuring that children develop physically and socio - the “Creative Human Capital” pillar in the New Kuwait Vision emotionally in the early years to maximize their human 2035. These Vision programs aspire to build the human capital capital potential. Parental education programs, which encour- needed to achieve the goal of economic diversification and sus- age parents to make the best evidence -based decisions for tainability. The GCC countries also have the advantage of pos- their child’s development, can promote breastfeeding, a sessing the financial resources to allocate a significant share of healthy diet, and effective ways for early cognitive and socio - their budgets to social sectors and carry out their human devel- emotional stimulation. Engaging communities in providing a opment plans. In addition, three GCC countries, Kuwait, Saudi healthy environment for young children can also take many Arabia and UAE, have been among the first 28 countries to forms. Community and religious leaders, for example, can be adopt the World Bank’s Human Capital Project, signaling their trained in effective ECD strategies, which they can communi- commitment to improving their human capital outcomes. cate to parents of young children in society. (For example, the Better Parenting project in Jordan trained imams and khatibs on how to teach about better parenting during or after Friday Strategies for accelerating human prayers, focusing specifically on their ability to reach fathers of young children.) 28 capital formation The GCC countries can adopt and adapt strategies based on evidence and international best practices to accelerate human capital formation. GCC countries have made important strides in expanding enrollment in preprimary education over the past four dec- Investing in early childhood development (ECD) ades, but scope for improvement remains. By 2016, 82 per- cent of children between the ages of 3 and 5 were enrolled in preschool in the United Arab Emirates (up from 32 percent in 1976). The gains have been equally impressive in Qatar (60 percent, up from 18 percent), Bahrain (55 percent, up from 9 The period from before birth to approximately 6 years of percent) and Oman (57 percent, up from near zero). Saudi Ara- age is critical to children’s development. During this period bia’s preprimary enrollment rate has lagged, reaching 25 per- the building blocks of the brain are formed, and the child ’s cent in 2016; however, the Kingdom’s authorities are working environment stimulates brain development.26 As a result, high- to expand preschool access under the Vision 2030 program. quality interventions during the early years can have higher Most GCC countries still have room to improve to reach the returns on investment than remedial interventions aimed at preschool enrollment levels seen in other high -income coun- young adults who lack the necessary foundational skills. Priori- tries around the world (Figure 11). The UAE’s private sector- tizing investments in the early years means that public spend- driven model of ECE expansion can be a useful example for ing should be targeted toward improving health and nutrition others to follow (Box 1). interventions for women and young children, encouraging pa- rental and community involvement in promoting child devel- But expanding ECD coverage alone is not enough; quality opment, and expanding access to high-quality preschool pro- matters. High-quality ECD programs can boost children ’s grams for all children. intellectual and social development, preparing them to enter 25/ EY survey of 1,000 students and 100 employers across the GCC. EY (2015) “How will the GCC close the Skills Gap”. 27/ El-Kogali, S., and C. Krafft. 2015. Expanding Opportunities for the Next Generation: Early Childhood Development in the Middle East and North Afri- 26/ World Bank. 2018. Expectations and Aspirations: A New Framework for ca. Washington, DC: World Bank. Education in the Middle East and North Africa. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/30618. 28/ Ibid. Prioritizing Early Childhood Education in the United Arab Emirates take children out of the home setting, may be ineffective or even counterproductive to maximizing their human capital Preprimary education gross enrollment rates in GCC development.33 countries The first three grades of school are key for ensuring that 100 children build critical skills necessary to effectively partici- 80 pate in their education, with evidence showing early grade 60 reading interventions making a substantial difference. 40 Basic reading, writing, numeracy, and socioemotional skills lay the foundation for learning throughout a child ’s life and 20 into adulthood. Children lacking these skills are at risk of fall- 0 ing behind, becoming disengaged from school, and not acquir- Bahrain Saudi Arabia Oman United Arab High-Income Qatar Kuwait ing the more advanced skills increasingly demanded in today’s Emirates Countries changing labor market.34 Evidence shows early grade reading programs are effective,35 while early childhood and early grade 1976 1996 2016 interventions that successfully boost foundational skills also maximize the use of public resources. Measuring early child- hood development outcomes using early grade literacy and numeracy assessments can shed light on the key drivers of ear- primary school ready to learn. There is ample evidence to show ly learning and help to identify gaps in the development of key that quality preschool education programs geared especially foundational skills from a young age. toward disadvantaged children have a positive impact on bene- ficiaries’ earnings and even reduce crime.29,30 These programs To enhance children’s readiness to learn, GCC governments are also more cost-effective than other education interventions, should aim to align preprimary schooling with primary edu- such as reductions in class size, and in helping to close perfor- cation to ensure a smooth transition for young children. En- mance gaps in socioeconomic status, ethnicity, and geographic tering primary classrooms with a different educational philoso- origin.31,32 Meanwhile ECD programs of low-quality, which phy (or language of instruction) can be a difficult transition for 29/ Elango, S., et al. 2015. “Early Childhood Education.” NBER Working 33/ World Bank. 2018. Expectations and Aspirations: A New Framework Paper No. 21766, National Bureau of Economic Research, Cambridge, MA. for Education in the Middle East and North Africa. Washington, DC: http://www.nber.org/papers/w21766. World Bank. 30/ Schweinhart, L. J., et al. 2005. Lifetime Effects: The High/Scope Perry 34/ Ibid. Preschool Study Through Age 40. Ypsilanti, MI: High/Scope Press. 35/ Graham, Jimmy, and Sean Kelly. 2018. “How Effective Are Early Grade 31/ Glewwe, P. 2013. Education Policy in Developing Countries. Chicago: Reading Interventions? A Review of the Evidence. ” Policy Research Working University of Chicago Press. Paper 8292, World Bank Washington, DC. http://documents.worldbank.org/ 32/ Heckman, J. J. 2006. “Skill Formation and the Economics of Investing in curated/en/289341514995676575/How-effective-are-early-grade-reading- Disadvantaged.” Science (312): 1900–1902. interventions-a-review-of-the-evidence. young children. Moving from play-based, collaborative, child- and learn. In other cases, wide-reaching policy reforms may centered learning to traditional teacher-centered instruction can need to place the improvement of learning outcomes by socie- undermine the positive impacts of even the most successful ECE ties’ most marginalized children at the forefront of the educa- programs. Therefore, aligning preschool and primary grade in- tion sector. The gender gaps are particularly concerning. With structional styles is important, with both focusing on develop- two parallel school systems—one for boys and another for mentally appropriate teaching and learning techniques. For ex- girls—the same policies for the two systems often lead to very ample, the United Arab Emirates is in the process of aligning different results in the classroom. Some countries have begun grades one and two of primary school with preprimary educa- to experiment with mixed -gender classes (boys and girls in the tion, which consists of two years of kindergarten, to create a same schools) and mixed -gender instruction (female teachers holistic ECE cycle covering all children from age 0 to 8. Fin- teaching boys as well as girls) in the early grades to see land, New Zealand, and various OECD countries have also un- whether these practices can help close gender learning gaps. dertaken similar efforts to align early childhood education with Whether these approaches are right can only be decided by learning in the early grades.36 each country’s societies and policymakers on the basis of the best available evidence. Preparing youth for the future Improving learning outcomes The teaching profession in some GCC countries is a job of last resort, and teacher absenteeism and tardiness are com- Countries should prioritize learning as the central purpose mon. Applicants into university education programs are often of education systems. To convert investment in education into selected from the lower end of the admissions exam distribu- economic growth, countries need to ensure that children attend tion. In systems where boys are taught by male teachers, an school and also learn the necessary skills that modern educa- equal number of male and female teaching applicants is need- tion systems should impart. This seemingly obvious objective ed. Yet—especially among the male candidates—those enter- may require a shift in social norms and agreement on a new ing the teaching profession often do so after not being able to social compact about the purpose of education. By moving gain access to other public sector jobs. Thus, the qualifications away from an outdated “credentialist equilibrium” toward a at entry and motivation on the job tend to be lower among new “skills equilibrium” (discussed below), GCC societies male teachers, contributing to lower quality instruction in may change the way they view the purpose of their education boys’ schools. Absenteeism is rampant according to reports by systems—to prepare students not for the guaranteed public school principals quoted in TIMSS 2015, 53 percent of grade 4 sector jobs that await them upon graduation, but instead to give students in Kuwait and Saudi Arabia attend schools where them the skills and competencies to compete for (and create) teacher absenteeism is a moderate or a serious problem. The jobs in the new economy. proportions are lower in other GCC countries but still exceed the TIMSS international average of 15 percent. By compari- son, only 2 percent of students in the world ’s top performing countries attend schools where teacher absenteeism is reported to be a problem. Similar trends are reported for teachers arriv- GCC countries can only aspire to reach the top tiers of ing late or leaving early (Table 5). global education rankings by making concerted efforts to improve the learning outcomes of low performing stu- Addressing these challenges requires the right mix of au- dents, and particularly by closing the gender gaps. This tonomy and accountability at school level. Teachers and requires focusing on students who are most at risk of failing to principals in the GCC report having relatively low levels of achieve key learning targets. In the GCC countries, these stu- decision-making authority when it comes to basic school man- dents are often male, rural, or come from less advantaged fam- agement and instructional decisions, such as formulating the ilies (such as those with lower educated parents). Enabling school budget and selecting the appropriate instruction materi- learning also requires the empowerment of teachers and als to be used in their school.37 Without the autonomy to effec- school leaders and the modernization of curricula and peda- tively manage their schools and the right mix of accountability gogical practices. In some cases, additional resources mechanisms to ensure that teachers show up to work and are (financial, human, and physical) may need to be allocated to able to teach effectively, school principals remain an underuti- the schools and localities where low performing students live lized resource in some GCC education systems. Through a 36/ OECD. 2012. Starting Strong III: A Quality Toolbox for Early Child- 37/ OECD. 2016. PISA 2015 Results, Volume 2: Policies and Practices for hood Education and Care. Paris: OECD. Successful Schools. Paris: OECD Publishing. http:// http://dx.doi.org/10.1787/9789264123564 -en. dx.doi.org/10.1787/9789264267510-en. combination of rigorous selection into the education profes- exam. Many top-performing education systems take a variety of sion, appropriate incentives for good performance, and the approaches to developing and implementing skills- or competency necessary authority to teach and manage effectively, frontline -based curricula. In U.S. public schools, competency-based sys- actors in the GCC’s education systems can play a key role in tems use state learning standards to determine academic expecta- improving student learning outcomes. tions and define “proficiency” in a given course, subject area, or grade level. In several East Asian education systems (such as Linking education outcomes to labor those in Hong Kong, Japan, Korea, and Singapore), competency- market needs based curricula aim to help students develop 21st century skills by reducing the relative weight of subject-centered education. Teaching the same things in the same way is unlikely to pro- duce graduates who are well-prepared to fill the jobs of the Reducing health risk factors of non- future. The nature of work is changing around the world and communicable diseases (NCDs) among the youth across the GCC, and education systems must change to meet this.38 This requires an alignment of key actors in society A focus on specific subpopulations to reduce NCDs and inju- around common educational goals, a modernization of curricu- ries—in particular, "catalytic populations," such as adolescents la (including for vocational education, technical education, and and youth, will be critical to maximize economic potential. The higher education), and a series of reforms beyond the educa- GCC region is experiencing a unique demographic period in tion sphere to allow GCC societies to move toward a new which more than half of the population is under 30 years of age. “skills equilibrium”. This presents an opportunity. However, an estimated two-thirds of premature deaths in adulthood result from childhood condi- tions and risky behaviors acquired during adolescence (WHO). Interventions that focus on the youth in the region can thus re- Official curricula should reflect the skills that prepare stu- duce NCDs in later years and maximize the productive and eco- dents for social and economic life, and any reforms should nomic benefits for the region. Some GCC countries have taken be aimed at ensuring that what students learn aligns with steps, such as applying taxes on tobacco products and sugary the skills they need. In countries where official curricula are drinks (for example in Saudi Arabia and the UAE), banning outdated and disconnected from practical, real-life content, the tobacco advertising, promotion, and sponsorship (in Qatar and result is a mismatch between what students acquire and what Bahrain), and reducing the amount of salt in bread (in Oman)39. society and employers require. Across the world, curricular However, more measures need to be taken, which include reforms are moving toward expressing outcomes in terms of school health programs that emphasize nutrition, physical activ- skills and competencies to be developed over a lifetime, and ity, and education about NCD risk factors and about avoidable away from subject material or concepts to be memorized for an injuries. And measures prohibiting the sale of junk food and 38/ World Bank. 2019. World Development Report 2019: The Changing Na- 39/ Kaneda, T and El-Saharty, S. (2017). Curbing the Noncommunicable Dis- ture of Work. Washington, DC: World Bank. http://www.worldbank.org/en/ ease Epidemic in the Middle East and North Africa: Prevention Among Young publication/wdr2019. People IS the Key. The Population Reference Bureau. Washington, DC. sugary drinks in school environments and regulating the adver- field so that the rules for employees and employers work tisement of unhealthy products to children and adolescents need equally for men and women. Second, make it easier and less to be strengthened. Ultimately, policies need to be adopted or expensive to hire workers using flexible contracts. Although scaled up that target both young people and those who influence labor laws are flexible in GCC countries, it is usually expen- them to ensure that a range of supportive, reinforcing interven- sive or impractical for employers to hire workers on a part - tions and programs are in place to maximize their benefit. time basis or temporary work contract. Such contracts are pre- ferred by some women, and even some youth, and also by em- ployers who cannot make a business case for hiring workers Improving human capital of long-term or by paying all the benefits that go along with per- manent or full-time work. Third, improving parental leave pol- adult population icies, so that women are better able to balance home and work responsibilities, would help. Emphasizing lifelong learning The changing nature of work in the modern economies of the GCC requires strong foundations for human capital and lifelong learning.40 Automation is reshaping work, shifting the Access to good quality child care can increase female labor demand for skills from narrow, job-specific, routine manual force participation because it frees up mothers who are inter- skills to advanced cognitive and socio-behavioral skills.41,42,43,44 ested in working. Of course, this is in addition to the many Skills associated with “adaptability” are increasingly in de- benefits preprimary enrollment have on children ’s success in mand. This combination of specific cognitive skills (critical school and later in adult life. Preprimary enrollment is low in thinking and problem-solving) and socio-behavioral skills GCC countries, certainly relative to the 86 percent enrollment (creativity and curiosity) is transferable across jobs. How well rate in OECD countries. In the KSA, only 24 percent of 3 to 6 - countries cope with the demand for changing job skills depends year-olds are enrolled in preprimary education. The enrollment on how quickly the supply of skills shifts. Countries can no rate is higher in Bahrain at 54 percent and in Kuwait at 57 per- longer wait for the next generation of school or university grad- cent, but the rates remain very low relative to the OECD aver- uates (the “flow” of workers) to enter the labor market to meet age. The UAE has made significant progress in recent years the demands of a rapidly changing knowledge economy. They with respect to preprimary enrollment rates, which have risen must ensure that access to lifelong learning opportunities is to 74 percent. However, despite the variation, and in many available to current workers (the “stock” of workers) along the cases, recent progress, GCC countries have the potential to entire duration of their productive lives. These opportunities can increase access to quality preprimary education. be offered through formal education systems (including short courses and certificate programs), as well as on-the-job training opportunities and other upskilling programs geared at adults. Increase female labor force participation Many women in GCC countries are out of the labor force or Increasing female labor force participation in GCC coun- have been unemployed for a long time. Therefore, their skills tries will require country-specific actions, but some com- are often outdated. To address this skills gap, especially con- monalities are as follows: sidering the changing nature of work, active labor market programs can be piloted. And, when evidence becomes avail- able about the impact of these programs, scaling them up can be considered. Programs might include short - and long-term training programs, depending on the needs of the client; on - At least three reforms emerge as important to increasing fe- the-job training through wage subsidy programs; and, an area male labor force participation. First, level the legal playing relatively underemphasized in GCC countries, namely, pro- grams to foster and facilitate entrepreneurship. Many GCC countries already implement active labor market programs 40/ World Bank. 2019. World Development Report 2019: The Changing Na- but, in many instances, coverage is small relative to the ture of Work. Washington, DC: World Bank. needs, and more generally, little is known about the impact of 41/ Cunningham, W. and P. Villaseñor. 2016. “Employer Voices, Employer the programs. Demands, and Implications for Public Skills Development Policy Connecting the Labor and Education Sectors.” World Bank Research Observer 31 (1): 102–34. 42/ Deming, D. 2017. “The Growing Importance of Social Skills in the Labor Market.” Quarterly Journal of Economics 132 (4): 1593–1640. 43/ Hanushek, E., et al. 2017. “Coping with Change: International Differences in the Returns to Skills.” Economics Letters 153 (April): 15–19. 44/ Krueger, D. and K. Kumar. 2004. “Skill-Specific Rather than General Education: A Reason for U.S.-Europe Growth Differences?” Journal of Eco- For example, an interesting study in Saudi Arabia provides evi- nomic Growth 9 (2): 167–207. dence that most young married men privately support female labor force participation outside of the home, but these men Reduce adult mortality and morbidity also substantially underestimate support for female labor force participation by other similar men.45 Therefore, helping to doc- ument attitudes and providing positive role models can be help- ful. In addition, women who work suffer the “double burden” syndrome (women balancing work and domestic responsibili- ties). Launching campaigns to encourage people to ease that A focus on interventions that minimize NCDs and burden can be helpful and inspire women not already in the transport injuries is critical to maximize human capital labor market to participate in it. potential and reap both health and economic benefits in the GCC region. The primary goals of such efforts should be to minimize disease and injuries and prolong and enhance the life and productivity of working age people, all while lower- ing increases in health care expenditures. This can be achieved Ensuring safety in the workplace and during the journey to by generating greater allocative efficiencies, focusing on cost work can increase female labor force participation because it effective and targeted “best buy” interventions, and strength- eases worries women and their families might have. To im- ening implementation efforts, as well as evidence generation prove safety in the workplace, countries have implemented for planning and monitoring purposes. A wide array of best policies that protect women in the workplace and have raised buy interventions within health and non -health sectors have awareness about the legal consequences of harassment. To been identified by the global literature and can be drawn on. address safety during the journey to work, some countries Tobacco control, for example, has been identified as “the sin- around the world (Egypt, Japan, and Mexico, for example) gle best health policy in the world” (see WHO reference and provide women-only public transportation.46 Finally, providing Savedoff & Alwang, 2015). All GCC countries have made women-only facilities can ensure women are included and feel some progress on such policies but could now focus on further comfortable in the workplace. scaling up or expansion. Best practice interventions include bans, taxation, and regulations on the sale, promotion or use Reduce the skills mismatch of tobacco products, and also on sugary drinks, alcohol, or foods high in calories, saturated fat or salt content. They in- clude investments in infrastructure to make roads safer, en- force existing laws, and to expand access and opportunities for recreational or physical activity. And strengthening service As discussed earlier, employers cannot find workers with the delivery capacity at the primary care level to maximize the skills they want, and hence the need to address the problem for monitoring and management of risk factors, as well as the use the current and future workforce. For the current workforce, of behavioral economics in road safety, tobacco use, un- upskilling and reskilling workers will require four actions. healthy diet, or physical inactivity. By working together and First, put in place a system to assess training needs (profiling drawing on global, regional, and national experiences, and system). This can be helpful to provide clients with the appro- introducing a smart combination of effective and sustainable priate intervention depending on their skills and demand for interventions that are feasible to implement and focus on cre- their skills. Second, for people who require more intensive ating long-lasting healthy behaviors, the region now has an training, for example reskilling—technical and vocational edu- opportunity to maximize the full potential of human capital in cation and training (TVET) programs can be useful. In many the region. GCC countries, there is scope to increase links between TVET institutions and the private sector; women’s enrollment can be increased; and courses available to women can be more strong- Creating an enabling environment ly linked to labor market demands. Third, short-term training programs can be used to upskill workers. Many GCC countries for a productive human capital offer these as part of a series of active labor market programs, but little is known about their effectiveness. Fourth, imple- Increase value for money menting on-the-job training programs, such as wage subsidy programs, if well targeted and well designed, can be an effec- Public spending on social sectors in the GCC can have higher tive tool for policymakers to help people receive training and returns and better outcomes if its effectiveness and efficiency are much valued work experience. improved. In the health sector, for example, reallocating re- sources from treatment to prevention can improve outcomes. An excessively large portion of health spending covers higher-cost secondary and tertiary care services, rather than targeting lower- 45/ Bursztyny, Leonardo, Alessandra L. Gonzalezz, David Yanagizawa -Drottx cost prevention, promotion, and primary care services. More (2018) “Misperceived Social Norms: Female Labor Force Participation in Saudi Arabia” NBER Working Paper No. 24736. resources should be reallocated from expensive hospital care and 46/ World Bank. 2013. Jobs for Shared Prosperity: Time for Action in the treatment abroad towards well-targeted primary and secondary Middle East and North Africa. Washington, DC. preventions that focus on creating and managing long-lasting healthy behaviors by individuals. While primary prevention any ideological or political rhetoric, and would have to focus on programs in the health, education, social, or transport sectors real, substantial reforms and not minor changes in policies.51 should aim to prevent adverse health events from occurring in Changing laws can also lead to a shift in norms. For example, the first place, secondary prevention programs should aim to laws on wearing seat belts in cars led to a shift in the social reduce the incidence, re-occurrence, or further health deteriora- norm for driving safety. However, it is not enough to enact tion after an event has occurred. In a model where such pro- laws. Laws must be enforced, and positive behaviors encour- grams are delivered by primary care practitioners, for example, aged. Meanwhile, a behavioral response to incentives in the at-risk patients can be more efficiently screened for NCD risk short run can lead to longer-term shifts in behaviors and social factors, and patients with chronic diseases more effectively norms.52 Two successful examples include sending text messag- managed and monitored. es to “nudge” parents to register their children for ECD pro- grams53 and encouraging peer tutoring in higher education.54 Adopt a multi-sectoral approach to human capital Conclusion Improvements in human capital do not depend exclusively on social sector policies. Many of the strategies designed to im- Economic growth depends on human capital, physical capital, prove human capital formation will require the collaboration of and factors affecting the productivity of both. This section different government entities (a whole-of-government ap- described one indicator that attempts to measure human capi- proach) with the private sector, communities, and families. tal formation, the Human Capital Index, for which the GCC Investments in the infrastructure sectors, complemented with countries score relatively lower than countries with similar investments in the social sectors, can make substantial contri- income levels. Various strategies relating to (i) expanding butions towards advancing the human capital agenda. For ex- access to high quality early childhood education, (ii) improv- ample, investing in early child development will require col- ing learning outcomes, (iii) linking education outcomes to laboration between health, education, social protection, and labor market needs and reducing (iv) mortality and morbidity family welfare government departments or ministries. Similar- were discussed. ly, bridging the skills mismatch will require strong collabora- tion between the education and the private sector. With their ultimate goal of achieving diversified and sustaina- ble growth, the GCC countries must combine the strategies Align social and political interests aimed at enhancing human capital with strategies that could (i) utilize their untapped economic potential and (ii) develop a Effective investment in human capital requires an align- dynamic private sector-led model of economic growth. At the ment of political will and multiple interests in society. 47 moment, potential productivity gains are lost because of low Ideological polarization and entrenched special interests can female labor force participation rates and a skills mismatch. hold countries back from enacting reforms that certain groups Policies geared towards improving the employability of wom- may perceive would reduce their power or ability to extract en, while also addressing the skills gaps through upskilling or benefits.48,49 One example from the education sector might be reskilling and aligning education and training systems with teachers benefiting from private tutoring. This group could try labor market demands, would improve productivity and eco- to obstruct reforms in student assessment systems that would nomic growth in the GCC by utilizing existing resources. A jeopardize the additional income they receive for private clas- recent study found that raising female employment to country - ses to prepare students for national examinations. This could specific male levels in Denmark, Egypt, Japan, and the UAE also be true of teachers’ unions thwarting reforms that would through to the year 2020 could increase national GDP by 4%, require teachers to work additional hours or significantly change their practice. Experience has shown that reforms can succeed if there is strong political will to implement them. An 47/ World Bank. 2018. Expectations and Aspirations: A New Framework for important step toward aligning political will and stakeholder Education in the Middle East and North Africa. Washington, DC: World Bank. interests could be to reduce the number of policymakers with 48/ Khemani, S. 2017. “Political Economy of Reform.” Policy Research Working Paper 8224, Washington, DC: World Bank. the power to veto policy reforms for political interests and 49/ Kingdon, G., et al. 2014. A Rigorous Review of the Political Economy of bring them in line with other stakeholders through a narrative Education Systems in Developing Countries. Education Rigorous Literature of shared values. Review. London: Department for International Development. 50/ World Bank. 2018. Expectations and Aspirations: A New Framework for Change norms and behaviors Education in the Middle East and North Africa. Washington, DC: World Bank. 51/ Khemani, S. 2017. “Political Economy of Reform.” Policy Research Working Paper 8224, Washington, DC: World Bank. Inefficient and outdated social norms can inhibit reforms 52/ World Bank. 2015. World Development Report 2015: Mind, Society, and that accelerate human capital development. 50 Changing Behavior. Washington, DC: World Bank. social norms is not easy, but it can be done. Raising awareness 53/ Escueta, M., V. Quan, A. J. Nickow, and P. Oreopoulos. 2017. “Education about the costs or inefficiencies of certain norms, or the bene- Technology: An Evidence-Based Review.” Working Paper 23744, Abdul Latif Jameel Poverty Action Lab (J-PAL). http://www.nber.org/papers/w23744. fits that would accrue to society from reforms, can help influ- 54/ Pugatch, T., and N. Wilson. 2018. “Nudging Study Habits: A Field Experi- ence a shift in the social mindset. However, such an effort ment on Peer Tutoring in Higher Education.” Economics of Education Review would have to be based on credible evidence not connected to 62: 151–61. https://doi.org/10.1016/j.econedurev.2017.11.003. 56%, 15%, and 19%, in those countries respectively. 55 De- interventions that enhance human capital with demand -side veloping a dynamic private sector by enhancing the business strategies for private sector development to achieve produc- environment will help spur the creation of the high quality, tivity gains that can help build the foundations for a diversi- productive jobs sought by GCC nationals. Public sector fied and sustainable model of growth. wage reform should also be considered to help reduce distor- tions in the labor market that arise from high public wages. In sum, the GCC countries must complement supply -side 55/ Paving the Way for Women’s Economic Inclusion in the GCC, World Bank.