The Middle East has witnessed a number of events in the past 50 years, but by far the most important is the discovery of massive fossil fuel reserves and the subsequent development of the hydrocarbon sector.
Although a number of crude oil discoveries were made between the 1920s and 1940s, those in the 1950s consisted of huge oil fields containing abundant oil reserves. These discoveries, together with a rapid increase in the demand for fossil fuel, turned the Middle East region into a global focal point, both economically and geopolitically.
The oil discovery in the Middle East has had major economic and social implications for the region.
Domestically, the region embarked on a massive infrastructure building programme. Given the magnitude of these projects, together with severe constraints in the labour market, the import of expatriate workforce became necessary. This was more pronounced in the Gulf Arab countries, where the size of the population was small.
The presence of an expatriate workforce has produced a number of benefits for the region in terms of infrastructure; from construction to the service sector, including education, health, electricity, water, telecommunications, and so on.
However, remittances by the expatriate workforce to their countries of origin have had some impact on the balance of payments performance of some countries.
In 1970s and 1980s, most government expenditure in the Middle East was directed towards building domestic infrastructure, with minimal effort being made to diversify the economy away from oil. Nonetheless, in the past decade or so, the region has been moving towards a more diversified economy, with diversification efforts focusing mostly on the petrochemical sector, energy-intensive industry and, to some degree, the service sector.
Economic development is intertwined with social development and the most important factor affecting these two areas is the slow pace at which the competitive, growth-based diversification process is moving forward. The endowment of hydrocarbon resources to a good part of the Middle East region has promoted an economic structure that in most part centres on oil and gas. Given the high birth rate in the region, unemployment pressure and the shortage of a skilled workforce, promotion of policies towards economic diversification becomes a necessity.
A competitive and growth-based diversified economy would help mitigate unemployment pressure by absorbing excess supply in the labour market. However, a competitive, diversified economy requires a sound institutional framework, and a skilled and competitive workforce.
Recent Arab human development reports have discussed the development of institutions and a knowledge-based society in the Arab world – a region that forms part of the Middle East.
While these reports acknowledge some strides in human development in the past three decades, more has to be done to acquire, increase and consolidate knowledge.
Additionally, more efforts need to be directed towards developing critical institutions.
The preponderance of the hydrocarbons sector in the Middle East has produced a myriad of benefits, some of which have spilled over regionally. Nonetheless, the region needs to move beyond oil-dependent economies and diversify to produce sustainable growth. Some challenges still need to be addressed. Oil and gas sectors are by their nature capital-intensive and, as such, are not a major source of employment; the Middle East region has a high birth rate and faces serious unemployment pressure; economies in the region are mainly state-driven; and the financial markets are yet to fully develop.
More importantly, the region needs a skilled workforce. The challenges mentioned above could be addressed by promoting a diversified economy that is competitive and growth-based even in the face of favourable oil prices. This policy goes hand-in-hand with investment in education that produces skills that will be used effectively and productively.
Indeed, a knowledge-based society working in an environment of good governance is critical to support a diversified and competitive economy that subsequently promotes sustainable growth. The benefits may not be limited to oil-producing countries of the region; the positive spillover effects may benefit the whole of the Middle East.
By Hamood al-Zedjali, executive president of OmanTel