The Road to Sustainable Development
 
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A strong, growing, sustainable economy is the goal of every nation in the world. A sustainable economy enhances a nation’s standard of living by creating wealth and jobs, encouraging the development of new knowledge and technology, and helping to ensure a stable political climate. Having a diverse economy—that is, one based on a wide range of profitable sectors, not just a few—has long been thought to play a key role in a sustainable economy. Recent research by Booz & Company confirms that is indeed the case. There is a link between economic diversity and sustainability, and economic diversification can reduce a nation’s economic volatility and increase its real activity performance. Furthermore, there are metrics that policymakers can use to measure these key economic dimensions and ways that they can promote their nation’s long-term economic health and stability.

Watch: Exploring sustainability for the Middle East

Studying Sustainable Development: Can Diversification Drive Sustainability?

This study grew out of Booz & Company’s work helping Middle Eastern governments, particularly those in the Gulf Cooperation Council (GCC), formulate their economic development strategies and transformation agendas—that is, their “transfor-mations” from economies based on a single commodity to robust, well-diversified ones. These countries, rich in hydrocarbons and with economies heavily invested in oil and gas, face a particularly daunting challenge in diversifying; consequently, it was important to determine just how critical economic diversity was to their creation of sustainable economies.

To answer that question, we broadened our focus beyond the Middle East region and scrutinized 19 different countries around the world with varying levels of economic maturity to assess their economic 2 Booz & Company diversification, volatility, and health.1 We studied the following:

• GCC economies, consisting of Bahrain, Kuwait, Oman, Qatar, the Kingdom of Saudi Arabia (KSA), and the United Arab Emirates (UAE)
• Group of Seven (G7) economies, consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States
• Transformation economies, consisting of Hong Kong, Ireland, New Zealand, Norway, Singapore, and South Korea (these economies initiated or completed transformation
  to an industrialized nation sometime in the second half of the 20th century).

Our analysis identified a clear link between economic diversification and sustainable growth. It also showed how diversification can reduce a nation’s economic volatility and increase its real activity performance.

These findings provide a firm reminder to policymakers worldwide that one key to building a strong, sustainable economy is building a diversified economy—one that is not overly dependent on a single commodity and that has a strong external as well as internal focus.

Evaluating Economic Diversification

Our initial analysis of economic diversification across the GCC, G7, and transformation economies produced three key findings.

Gross Domestic Product (GDP) Should Be Distributed Across Sectors. To begin, we assessed the economic concentration and diversification of the GCC, G7, and transformation economies in the study. We wanted to find out whether their GDPs were evenly distributed across a wide variety of economic sectors—or whether they relied heavily on just one or two sectors.

We measured diversification by evaluating the distribution of a nation’s GDP across its various economic sectors, such as agriculture or manufacturing, to determine a “concentration ratio” and a “diversification quotient.” The concentration ratio measures a nation’s concentration in a given sector by taking the sum of squares of percent contribution to GDP. The diversification quotient is the inverse of the concentration ratio;
it provides a metric that policymakers can use to gauge their nation’s economic diversity. Essentially, the lower the concentration ratio and the higher the diversification quotient, the more diversified a nation’s economy.

Exhibit 1: Economic Concentration and Diversification in the GCC, G7, and Transformation Economies, 2005

Article Index

• Exhibit 1: Economic Concentration and Diversification in the GCC, G7, and Transformation Economies, 2005
• Exhibit 2: GDP Breakdown by Economic Sector in the GCC, 1975–2005
• Exhibit 3: GDP Breakdown by Economic Sector in the GCC, G7, Transformation, Canadian,
  and Norwegian Economies, 2005
• Evaluating Economic Sustainability
• Exhibit 4: GDP Labor Productivity in Comparable Hydrocarbon-Rich Economies, 2005
• Exhibit 5: UAE Productivity Analysis by Economic Sector (Based on Recent, Reliable Data)
• Exhibit 6: Oil Price Change versus Real GDP Growth in the GCC, G7, and Transformation Economies, 1997–2005
• Exhibit 7: KSA Employees and Growth Volatility by Economic Sector
• Exhibit 8: External Trade Diversification and Economic Stability in the GCC, G7, and Transformation Economies
• Diversification Is a Critical Component of a Sustainable Economy
• Exhibit 9: Real GDP Growth, Historical Volatility, and Risk-Adjusted Performance in the GCC, G7, and Transformation Economies, 1974–2005
• Effecting Sustainable Development: Summary of Key Findings and Recommendations for Policymakers
• Exhibit 10: Relationship between Economic Diversification and Economic Sustainability

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Author Profiles

Richard Shediac, is a partner with Booz & Company based in Abu Dhabi. His work focuses on the public sector and the health industry, and includes policy formulation, corporate and business strategies, organization and governance, and implementation.

Rabih Abouchakra is a partner with Booz & Company based in Abu Dhabi. He focuses on public administration modernization, public policy, large-scale transformation, and organizational development and change management.

Chadi N. Moujaes is a principal with Booz & Company based in Beirut. He focuses on public policy, socioeconomic development plans, public administration modernization, large-scale transformation, and performance management.

Mazen Ramsay Najjar is an associate with Booz & Company based in Beirut. He focuses on public policy, socioeconomic development plans, macroeconomic policy and governance frameworks, and turnaround and transformation projects.

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