The strive for oil-independence: Transforming from an oil-driven to a data-driven economy

The Arab Gulf States are in a historic transition as they seek to reduce their dependence on oil and natural gas and diversify their economies. Genuine economic diversification requires the Gulf states to create sectors, industries, and firms that have the initiative to survive and prosper on their own, rather than relying on oil or natural gas revenues.

Through innovation acceleration programs, UAE officials encourage technology companies to work with government agencies to develop not only initiatives, but also services that help draft laws and policies. Measures to encourage accountability, transparency and the fight against corruption in developing countries with commodity industries such as oil and gas will have a significant impact on the energy market. Ultimately, the Gulf states can spur economic growth that is not dependent on government subsidies and oil and gas revenues. 

Oil and natural gas revenues have enabled Gulf states to build public institutions that stimulate economic development, but their large public bureaucracies and national public enterprises have cost-centered interests and incentive structures into states "political economies that cannot be reversed. Much of the private-sector activity in the GCC countries remains tied to government contracts and expenditures, which in turn are financed by oil or gas revenues. The expected decline in hydrocarbon reserves and revenues should motivate GCC countries to diversify their economies and develop productive sectors beyond oil and gas. 

While the GCC countries have made some progress over the last decade, oil and gas production as a share of gross domestic product (GDP) remains above 40% in most countries, particularly the United Arab Emirates (30%) and Bahrain (18%), and much of other economic activity in the regions, such as construction and infrastructure development, is supported by oil and natural gas revenues.

Named after Sheikh Mohammed bin Rashid Al Maktoum, his vice president and emir of Dubai, the new Special Fund for Finance and Innovation provides capital to innovators, start-ups and incubators in an attempt to catapult the UAE into the world of innovation as they seek to diversify their economies away from oil and improve their global standing. The Milken Institute says that the Government of Bahrain, along with the United Arab Emirates, is pursuing a nationwide approach to fintech development and promotion, with the Central Bank of Bahrain overseeing the financial services sector and its governor Rasheed Mohammed Al Maraj adopting an innovative mindset to promote the country as a fintech hub in the region.

The COVID-19 pandemic is a chance to rethink decades of heavy reliance on oil reserves

The COVID-19 pandemic had a profound impact on the economies of the Middle East and exacerbated the structural problem of unemployment in the regions and increasing poverty. The closure of schools and jobs has highlighted the digital divide in the regions, as those without reliable internet access are unable to work and continue their education. These two shocks have heightened the urgency of reducing oil's impact on government spending and moving toward economic growth based on innovation, education, basic skills, and private investment in technology. 

The data center industry has experienced massive and rapid growth in the region, aided by the private sector's need to store and harness data for profit. Increasingly, the Gulf states have been swept away by the global data revolution, and they are transforming from an oil-driven to a data-driven economy. As a consequence, digital transformation, data and governance have become vital issues in the region. In order to strengthen the growing digital economy in the regions, governments should work with national actors, the local private sector and international organizations to shift regulatory processes to a regional level to make it easier for companies to do business in multiple countries. The future of a digital Middle East requires the participation of all stakeholders: Heads of State or Government, individual authorities, the private sector and civil society. Over the past decade, Gulf states presented ambitious plans to transform their public and private sectors to provide reliable, fast and efficient public and private services.

The UAE recently announced that it is committed to double the size of digital economy in 10 years. According to Suneeti Ahuja Kohli from Khaleeji Timesthe UAE has always had a policy of not regulating for the sake of regulation. Building on an innovation history, the region has the opportunity to transform itself into a leading digital economy and reap significant economic benefits by bringing all stakeholders together and focusing on developing its governance, business finance, and talent. Oman as another example seems to be even more interested in digital projects than other Middle Eastern countries, having recently launched a national broadband strategy to increase its low fixed-line broadband penetration. PWC highlights that artificial intelligence will contribute up to $320 billion to the Middle East economy in the next ten years.

The growing digital economy space in the Middle East

The digital economy in the UAE is being implemented through the adoption of the Fourth Industrial Revolution Strategy of the UAE, which aims to increase economic security through adoption of the digital economy and blockchain technology in financial transactions and services. The strategy aims to stimulate innovation, strengthen the national economy and improve citizens' well-being by focusing on several areas, including innovative education and medical sectors, as well as economic security through adoption of digital economies and blockchain technology. The UAE Advanced Technology Research Council is a forward-thinking organization with the goal of developing a world-leading R&D ecosystem in Abu Dhabi that prioritizes attracting and retaining global research talent. 

The UAE has become the most important center of the digital economy in the Arab world and strives to become a global center of technological innovation. The Arab Gulf states have a digital transformation agenda with a political and financial commitment to creating a knowledge-based economy. Jordan, one of the pioneers in technology startups, has allocated considerable resources to stimulating economic growth through digitization, forming the first Digital Economy Ministry in the Arab world. The Vision 2030 of Saudi Arabia, the 2020 National Transformation Plan, Smart Dubai, Qatars Connect 2020, and ICT policies, as well as Oman's digital strategy of e-Oman, are solid examples of the focus of the Middle East on building an energy economy. The digital wave, which has led to economies in the region being attributed to strong GDP growth rates, has prompted governments to launch initiatives such as Smart Cities, Smart Tourism, Digital Healthcare, Classroom of the Future, and Smart Government. Policies that embrace digital adoption, promote sustainability, accelerate economic diversification and tap into increasing technologies will ensure that the region is on track to become a powerful digital economy.

In recent years, the Middle East's leading economies have taken steps to transform their infrastructure. Financing and support for digital enterprises, EODB reforms and new technological regulations are essential for economies to attract private sector investment in this area, support their archetypal strategies and provide a conducive environment for digital enterprises to test new technologies and drive innovation. Countries that invest in infrastructure have the opportunity to seed the seed for future start-ups and innovative companies by investing in the digital economy.

The EU used its position as the world's leading regulator to help countries in the Arab world establish policy frameworks to strengthen their digital economies.

The establishment of the UAE as a leading provider of regional digital regulatory standards and the development of specialised know-how should bring similar benefits to the UAE economy. The UAE has the opportunity to add value through increased domestic R & D and commercialisation activities in emerging digital technologies. Abu Dhabi Investment Office (ADIO) said that Abu Dhabi’s digital economy will be boosted in the first half of 2022 by the introduction of AWS in the Middle East and UAE region, aimed at accelerating the roll-out of cloud services and enabling organisations to innovate. As Dubai continues to pursue its digital path it will not only put itself technologically on the map, but will also be able to benefit from changes in the global digital economy. AWS will improve access for businesses to advanced technologies from world-class cloud service providers and help them drive innovation and transformation in both Abu Dhabi and the United Arab Emirates, stated the statement. 

Overall, digital technologies are expected to contribute to the basis of the economic and social development goals of the Arab strategy for the digital economy.The Dubai Chamber for Digital Economy was established to lead global economic development in Dubai, strengthen its position as a global economic centre and to transform the UAE into an international technology center with significant investment in e-commerce and emerging technologies. By comparing the indicators of the digital economy in the United Arab Emirates with thresholds for innovation centres, we may identify key gaps in technological skills and fundamentals. For example, according to the UK analysis, the growth of the digital sector was six times faster in 2018 than the economy of the country as a whole. The UAE is expected to strengthen its position in the digital economy supported by factors such as the development of e-commerce, improvements in IT infrastructure, the increasing penetration of internet services and the use of smartphones, the expansion of electronic payments systems and significant government support for digital transformation. Given Saudi Arabia's large population and substantial government support for technological development, the digital economy of the country is expected to grow in the coming years. 

If the GCC countries are to play a leading role in shaping the future of digital economies and base their economic transformation on them, they must address the risks directly. In fact, the digitalization of the private sector and public services has been seen for some time as central to efforts by governments from the Gulf Cooperation Council to diversify their economies and growth positions, and the coronavirus pandemic accelerated this process. The main challenges for the growth of the digital economy in the UAE remain the lack of qualified IT professionals to help businesses digitize and the lack of spending on technology.

Further reads

• The Long Road to Economic Transformation in the Gulf By Nader Kabbani: https://www.thecairoreview.com/essays/the-long-road-to-economic-transformation-in-the-gulf/
• The oil-reliant United Arab Emirates is betting big on tech start-ups and A.I. by Dan Murphy: https://www.cnbc.com/2019/05/02/oil-reliant-uae-bets-big-on-tech-start-ups-and-ai.html
• FinTech In The Middle East: 2021 Forecast by Paul Shumsky: https://www.finextra.com/blogposting/19845/fintech-in-the-middle-east-2021-forecast
• The role of oil and gas companies in the energy transition, Global Energy Forum by Robert J. Johnston, Reed Blakemore, Randolph Bell: https://www.atlanticcouncil.org/in-depth-research-reports/report/the-role-of-oil-and-gas-companies-in-the-energy-transition/
• Building the Arab Digital Economy – A Strategy Blueprint By Ali Al-Khouri: https://dubaipolicyreview.ae/building-the-arab-digital-economy-a-strategy-blueprint/
• MENA Economic Update by The World Bank: https://www.worldbank.org/en/region/mena/publication/mena-economic-monitor
• Digital Transformation and COVID-19 in MENA: Turning Challenge into Opportunity By Manuel Langendorf & Alexander Farley: https://www.wilsoncenter.org/article/digital-transformation-and-covid-19-mena-turning-challenge-opportunity
• UAE's digital sector to grow faster than rest of the economy: https://www.thenationalnews.com/business/uae-s-digital-sector-to-grow-faster-than-rest-of-the-economy-1.680046
• The data centers industry: The GCC’s new oil fields by Ahmed El-Masry: https://www.mei.edu/publications/data-centers-industry-gccs-new-oil-fields
• The UAE Digital Economy: Weaving The Thread Between Innovation And Legislation by Sam Blatteis: https://www.entrepreneur.com/article/340630
• UAE is committed to double the size of digital economy in 10 years, top official says by Suneeti Ahuja Kohli: https://www.khaleejtimes.com/news/uae-is-committed-to-double-the-size-of-digital-economy-in-10-years-top-official-says