Innovation is Born out of Crisis: The GCC Must Capitalize on this Moment

GCC

Economy & Innovation

Commentary

Dr. Dania Thafer

Joseph Schumpeter argued that the entrepreneur generates “creative destruction” as innovation causes modes of thought, technologies and systems to become obsolete.  He further argued that this creative destruction produces continuous progress by improving standards of living for society on a whole.  With an overwhelmingly young population in the Gulf, offline-to-online behavior currently underway across the region is likely to stick around once Gulf Cooperation Council Countries (GCC) governments relax stay-at-home restrictions.

March 11 marked an inflection point (a quantum jump really) for traditional business in the GCC. When the World Health Organization declared COVID-19 a global pandemic, demand shifted to where there was supply – the digital sphere. In a little over a month, consumers in the GCC have gone from living in a largely brick-and-mortar retail world to one that is predominately digital. COVID-19’s silver lining for the Gulf economies is that safety measure orders are forcing long-overdue innovations in the digital sphere.

The swift digital transformation is triggering changes to traditional business models and upending existing competitive advantages to provide an opportunity for diversification through innovation-led development that has potential to harness the Gulf’s young human capital. Policymakers in the Gulf tend to live in façade of a thriving economy during oil booms and mistakenly invest heavily in large white elephant projects causing overspending and substantial opportunity costs for nascent private sector development.

As GCC countries begin looking to recover from the COVID-19 pandemic, there should be a sharper focus among industry leaders on growing high tech sectors such as e-commerce, fintech and information and communication technology (ICT) services. Empowering entrepreneurs and Small Medium-sized Enterprises (SMEs) in these sectors will not only employ national human capital and diversify the economy but can increase economic and political security by reducing risks associated with overspending during booms and austerity measures during fiscal crises.

 The Silver-lining of Covid-19: Innovation

Innovation is born out of crisis. When Chinese e-commerce giant Alibaba launched the company’s online shopping platform in 2002 as the SARS epidemic shut down much of the country, businesses and consumers were driven to the internet, marking a key moment in China’s digital revolution. Similarly, GCC industry leaders must capitalize on the current crisis as an opportunity for innovation that will provide long-term development and growth.  Along with crumbling oil prices, GCC industry leaders today are facing massive transformations in their business practices as they adjust to both changing consumer habits and a volatile economy. Herein lies the opportunity.

In the past, a key obstacle in pursuing a digital transformation was the trust deficits displayed by many business leaders and consumers in e-commerce, fintech and ICT services. Now, more than ever, is the chance for Gulf policymakers to capitalize on building and growing trust in digital transactions and lay the groundwork for a digital economic ecosystem by empowering SMEs and entrepreneurs.

While GCC economies undergo major shocks, a new generation is also entering the workforce. The tech-savvy Gulf youth make up the region’s largest age demographic. In Kuwait, Bahrain, and Qatar’s youth in 2017 consisted of 70.2, 65.4, and 71.7 percent of the population, respectively. Not only are they the majority but they are the most educated generation in Gulf’s history. Creating opportunities in the digital economy through entrepreneurism and the establishment of SMEs for this young human capital goes hand in hand with sustained diversification of the economy.

As the GCC states face looming fiscal deficits, empowering their young working-age populations would ease the fiscal burden away from the oversaturated public sector. Across the GCC, there is an average of 34.4 percent of nationals employed in the private sector. Additionally, whenever Gulf states have faced cyclical downturns in the economy, there is an exodus of expatriate workers which inherently risks losses in both the diversification of the economy and human capital. If the surging human capital of Gulf youth were positioned strategically to fill these gaps, GCC economies would not be as susceptible to cyclical losses in expertise, constant disruptions to long-term projects, and losses in economic diversification.

Innovation, Diversification, and Security

Innovation-led development and youth employment are inextricably linked to the security of GCC states. In 2011, Gulf governments invariably responded to youth-led Arab Spring movements by resisting substantive political change and instead focused their energies on innovation-driven economic reforms.

Consequently, Gulf states have taken steps towards innovation-driven economic development following the Arab Spring as a strategy to meet two critical objectives—economic diversification away from hydrocarbon resources and the preservation of political and economic stability in light of restless youth majority populations. For example, as part of the “2030 visions”, Kuwait, Qatar and Bahrain all have launched various firm incubators, business accelerators, and seed investment funds through state institutions such as Kuwait National Fund for Small and Medium Enterprise Development (KNFSMED), the Qatari Development Bank (QDB), and Tamkeen of Bahrain.

Yet a fundamental difference between today and the early 2010s is that GCC states today are economically weaker. The demand shock on pillars of their economies –tourism, aviation, and logistics— coupled with oil price declines are adversely affecting their budgets and spending. Consequently, simmering tensions or high unemployment rates among the region’s youth during these times will not be met with the ruling largess (or mukarim) as it was in 2011 when state-conferred benefit packages were generously offered to many citizens.  Following the Arab Spring, total state spending across the six GCC states increased by 20% in 2011.

Exploiting the Entrepreneurship of Youth Will be Key

If smart policies and bold decisions are made to harness the human capital of the Gulf’s young population, there should be a marked increase in the demand for new tech products and services. As events evolve quickly, Gulf states must take certain steps in this narrow window of opportunity to secure long-term economic benefits of Covid-19’s digital economy.

First, governments must swiftly adjust the regulatory framework to encourage new start-ups and incentivize innovation at existing private firms.  Second, as expatriate workforces depart, states should take steps to replace them with Gulf nationals. This transition would help maintain continuity on existing projects and mitigate the endemic risks associated with having a transient workforce.  Third, business leaders need to be incentivized to maximize profit by contributing to dynamic private sector development rather than as soliciting large tenders for burdensome mega-projects.

Wide-reaching mega-projects to diversify Gulf economies need to be substituted by less costly more efficient projects that yields productivity while adds diversification in the short-term. Slow-moving and cumbersome mega-projects such as Saudi Arabia’s flagship crown jewel, Neom, are not sustainable in the current fiscal environment and are subject to cyclical downturns.

The GCC states cannot afford to squander this moment that is ripe for expanding e-commerce, fintech and ICT services.  In this dark time when the world combats a global health pandemic, there is an opportunity to utilize one of the region’s most abundant resources –human capital. If GCC states want to diversify their economies and take advantage of their surge in youthful human capital, policies that focus on innovation-led development of the private sector can mitigate some of the political and economic risks of cyclical downturns.

Dr. Dania Thafer is the Executive Director of Gulf International Forum and a Visiting Scholar at Georgetown University’s Center for Contemporary Arab Studies.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.