Book Launch - Breaking the Oil Spell: The Path to Diversification
A new IMF book titled Breaking the Oil Spell looks at economies that have made successful strides in diversification like Brazil, Korea, Mexico, and Malaysia, and the lessons for Gulf countries and other oil exporters. To celebrate the book’s launch, panelists discussed key elements for achieving economic diversification.
Key policy recommendations. Policymakers should focus on developing dynamic export markets (Hasavov). Diversification has to start somewhere and can begin by focusing on a more limited set of industries. (Cherif) Facilitating entrepreneurship is essential. (Johnson) Educate your nationals (DeLong). Recognize the industries of the future (Aziz). Know your country’s’ strengths and where it can fill gaps in the global market (Bustani).
Role of the state. Hasanov noted that standard growth models are not sufficient to achieving diversified growth. In addition to addressing government failures, policymakers must address market failures, changing incentives for firms and workers to move toward more dynamic sectors. De Long noted that the state can play a role by identifying a country’s comparative advantage and reducing corruption.
New phase of diversification. De Long wondered whether the game is still the same? Do policymakers still want to nurture engineers in order to take advantage of technologies of the first and second industrial revolution? Or, will there be a different narrative of economic development over the next forty years? Johnson thought the latest narrative of economic development is one based on science and research and development.
Sector focus. Hasanov noted that the choice to diversify via the service sector versus the manufacturing sector depends on the potential productivity gains. Cherif noted that the frontier between services and manufacturing is fading. There are more productivity gains to be had with service sectors that are more strongly linked to the manufacturing sector.
Financing diversification. Aziz noted that the development of domestic sources of finance have been an important part of Malaysia’s success, including SME financing and capital markets to support infrastructure spending. Bustani noted that although the UAE is a net exporter of capital, foreign investment is still important for diversification to form strategic partnerships.
Labor markets. De Long noted that open labor markets have been an enormous source of wealth in the Middle East. Successfully managing open labor markets on both an economic and political level is extremely fraught, but that is the case everywhere (e.g. the U.K. debate over EU migration, rhetoric in the current U.S. election).
“State-led development is excellent, but there is nothing worse than the attempt at state led development when it is led by an anti-development state.” J. Bradford DeLong, Professor, UC-Berkeley
“You have to have economic flexibility. That means you can move resources and labor from one industry to another.” Zeti Akhtar Aziz, Governor, Bank Negara Malaysia
“You cannot have everybody working for the government. This is the problem with oil producing countries…Governments provide the highest salaries and they crowd out the private sector.” Khalid Ali Al Bustani, Assistant Undersecretary of International Financial Relations at Ministry of Finance, UAE
“There are enormous gains to be had from taking advantage of the fact that people want to come to your country, want to live there, want to be useful there, provided you are able to use your wealth to upgrade the human capital and the advantages of your native born nationals in such a way that you are happy with the outcome.” J. Bradford DeLong, Professor, UC-Berkeley
Chair: Min Zhu, Deputy Managing Director, IMF
H.E. Obaid H. Al Tayer, Minister of State for Financial Affairs, UAE
Zeti Akhtar Aziz, Governor, Bank Negara Malaysia
J. Bradford DeLong, Professor, UC-Berkeley
Simon Johnson, Professor, MIT Sloan
Jeffrey Sachs, Professor, Columbia University (via video)
Reda Cherif, Economist, IMF
Fuad Hasanov, Economist, IMF