Publication - More Bang for the Buck in the GCC: Structural Reform Priorities to Power Growth in a Low Oil Price Environment - Gulf Cooperation Council Annual Meeting of Ministers of Finance and Central Bank Governors
The new environment of low oil prices has led to a deterioration in the growth prospects of the Gulf Cooperation Council (GCC) economies. Movements in oil prices, through their impact on fiscal policy, are often the main determinant of economic activity in oil exporting countries. In the GCC, strong non-oil growth has occurred primarily during periods of high oil prices, and lower growth has coincided with periods of low oil prices.
The drop in oil prices since mid-2014 is prompting significant fiscal adjustment, which is dampening growth prospects. While new evidence indicates that fiscal multipliers have fallen in recent years, suggesting inefficiencies in public spending, and that the negative impact on growth as that spending is curbed may be smaller than previously thought, fiscal consolidation will still be a drag on growth. Estimates of fiscal multipliers —the metric that helps assess how much output could fall when government spending falls—are smaller for current than for capital spending.
In contrast to international experience, past growth in the GCC has been driven by factor accumulation. Internationally, high and sustained growth has coincided with improvements in total factor productivity. In contrast, high and sustained growth in the GCC has been the result of factor accumulation, both labor and capital, rather than improvements in productivity. This suggests there is scope for structural reforms to boost productivity, which could serve as a new engine for growth in the current low oil price environment.
Supporting growth prospects in the medium and longer-term in the GCC will require a range of actions:
Designing a growth friendly fiscal adjustment, including through improvements to spending efficiency. Such an adjustment would target cuts in current spending, spread deficit reduction measures over time in a predictable way, and improve public spending efficiency to ameliorate the impact on growth from fiscal consolidation.
Implementing structural reforms to improve productivity. Product markets reforms —for instance, improving the business environment, reducing trade barriers, institutional reforms to the legal system and property rights, and privatization—should be a priority. Reforms to enhance labor market flexibility and reduce the public-private sector wage gap should also be adopted, although paced over time.
Leveraging the experience of the top performers in the region to design and implement structural reforms. While GCC countries have enacted structural reforms in recent years, surveybased international rankings on structural indicators generally show uneven progress, with the exception of UAE and Qatar. Successes and challenges in the design and implementation of structural reforms in other countries offer extremely useful lessons for those now considering such measures.
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