Not Too Fast, Not Too Slow
Why the Pace of Productive Diversification Matters for Economic
Development
Master of International Business Thesis
Submitted by Jordan K Fabyanske
February 20, 2010
Abstract
Is there a speed limit to productive diversification? What does
rapid diversification entail in terms of resource requirements for
economic governance? Complementing existing literature on the
benefits of diversification for economic development, I examine the
public sector labor requirements associated with the
diversification of output across economic sectors. Evidence from
time-series and panel data for 16 countries, as well as the case of
Abu Dhabi’s economic transformation since 1975, suggests that
aggressive diversification may lead to problematic imbalances
between public and private sector employment. In view of these
potential imbalances, I argue that policymakers should be less
aggressive and more deliberate in their pursuit of productive
diversification and adopt priorities to optimize the pace of
achieving their economic development aspirations.
I. Introduction
The relationship between productive diversification and economic
development has received increasing attention in recent economic
and industrial policy literature. Referring to the distribution of
output, value-added and employment across sectors of an economy,
productive or economic diversification is increasingly recognized
as a key solution to economic volatility and an important enabler
of long-term growth. Controversial industrial and economic policies
are center stage as academics, economists and policymakers debate
the optimal approach to the transformation of concentrated and less
developed economies. Although the scope of current debate on
diversification runs the gamut of policy areas, one key aspect of
such transformation remains neglected, namely the appropriate pace
and necessary resources for a government to facilitate a successful
diversification process.
This paper aims to address this gap, questioning the implicit
assumption that the rate of diversification itself is without
negative consequence. In terms of approach, I adopt a two-part
research design to examine the relationship between diversification
and its associated governance resource requirements. Looking
specifically at human resource requirements for public
administration, I use both panel data from a diverse set of 16
countries and evidence from one country case study of rapid
diversification. Across countries, I find a positive and
statistically significant correspondence between changes in public
sector employment and the pace of diversification. Taking a closer
look at rapid diversification in Abu Dhabi, I also find evidence
that employment in public institutions of economic development, as
well as public sector wages, reflect an economic explanation for
unusual demographic imbalances in the Emirate’s labor force.
Specifically, unlike political explanations for the concentration
of national employees in the Abu Dhabi government, I find that high
demand for national labor in the public sector adversely affects
the incentive for nationals to pursue job opportunities
elsewhere.
Following a review of recent literature on economic
diversification, this paper is organized around seven subsequent
sections. I first articulate the key gap in current literature that
inspires my central research question. Next, I describe the
methodology selected to address this question. In the following two
sections, I present the results of my research and articulate
several alternative explanations with respect to trends in
cross-country panel data, as well as the specific case of Abu
Dhabi. I then draw implications for both national security and
development policymaking. In view of these implications, I turn to
specific policy prescriptions for optimizing the pace of economic
diversification. Finally, I conclude with a summary of findings
from my analysis and a discussion of key areas for further
research.
II. Background and Literature Review
I begin by presenting several important findings from recent
literature that have direct bearing on my central research question
and that provide necessary context for my research design and data
analysis. In particular, I review two studies which highlight the
importance of structural transformation for economic development.
The first study (2003) establishes that a country’s level of income
per capita varies significantly as a function of its level of
productive diversification. The second study (2008) examines the
importance of diversification for concentrated economies, arguing
that the level of economic concentration is a key determinant of
real economic growth volatility and that the level of economic
diversification is a key determinant of long-term,
volatility-adjusted growth. For the sake of providing necessary
context, I then turn to several studies which underscore the
importance of industrial policies and institution-building for
facilitating diversification and thereby unlocking sustainable
development.
a. Development as a Function of Diversification
As noted by Rodrik (2006), “Productive diversification is a key
correlate of economic development.” Articulating a variety of
policy implications stemming from this central result, Rodrik
builds on a study by Imbs and Wacziarg (2003) of the patterns of
sectoral concentration in a large cross-section of countries, as
well as within countries over time. Imbs and Wacziarg found that
among less developed countries, those with more diversified
economies tend to have higher levels of income per capita. This
trend holds until countries reach an income level of approximately
US$9,000 per capita, after which higher levels of income per capita
are then associated with increased specialization. Plotting
sectoral concentration and income per capita, using both sectoral
employment and sector value-added data, the authors obtain a
U-shaped curve (see Figures 1a and 1b). While the process of
sequencing industries can differ from country to country depending
on factors such as geography, size, and endowments, empirical
evidence nevertheless suggests that economic activity is
increasingly distributed across sectors in the first stage of a
country’s development. Undertaking a variety of robustness tests,
Imbs and Wacziarg established that
“the U-shaped pattern is present even when one focuses on the
manufacturing sector alone, suggesting that what is going on here
is not just a structural transformation from agriculture to
industry, but also a process of diversification and expansion of
the range of activities within manufacturing.”
The notion that economic development initially requires
diversification runs counter to a fundamental insight of the pure
theory of international trade. The law of comparative advantage,
attributed to David Ricardo in his 1817 book On the Principles of
Political Economy and Taxation, states that countries can gain by
specializing in goods where they have lower opportunity cost of
production, and by trading those goods with one another. Thus, by
specializing in those activities that they are relatively good at,
less developed countries can reap the benefits of openness and
engagement with more developed countries. As noted by Rodrik
(2006), “There is a large literature, typified by the
Little-Scitovsky-Scott/Bhagwati-Krueger/Balassa studies of the
1970s [undertaken by the OECD, NBER, and the World Bank], that
ascribes the underperformance of developing nations to their
failure to let domestic resource flows be guided by the forces of
comparative advantage.”
With respect to sources and methodology, Imbs and Wacziarg
(2003) employ sector data from the International Labor Organization
(ILO) and United Nations Industrial Development Organization
(UNIDO). While data from ILO pertain to employment shares across
sectors covering all economic activities, data from UNIDO pertain
to output of the manufacturing sector. The authors defend both
sources of data as complementary bases for the measurement of
diversification across sectors and within the manufacturing sector.
In order to measure the extent of diversification, Imbs and
Wacziarg (2003) focus mostly on the Gini coefficient for the
inequality of value-added across sectors as a proxy for economic
concentration. Maintaining that “there are many different measures
of dispersion and no particular reason to favor one or the other,”
the authors characterize diversification using the
Herfindahl-Hirschman index (HHI) for sectoral concentration, the
coefficient of variation of sector shares, the max–min spread, and
the log-variance of sector shares. According to the authors, these
measures are interchangeable and yield consistent results.
In 2008, the consulting firm Booz Allen Hamilton Inc. (Booz
Allen) published a study entitled “Economic Diversification: The
Road to Sustainable Development,” in which Abouchakra, Moujaes,
Najjar and Shediac build on the findings of Imbs and Wacziarg. The
authors establish a statistically significant relationship between
diversification and sustainable growth, first by offering
illustrative evidence that a country’s level of sectoral
concentration is a key determinant of its level of economic growth
volatility. The study highlights the fact that oil-based economies
of Gulf Cooperation Council (GCC) countries have been more
sensitive to oil shocks than both the Group of Seven (G7) countries
and a selection of “transformation economies” that recently
achieved a high degree of productive diversification. The authors
then offer statistical evidence, using a cross-section of country
data to assess the relationship between GDP growth volatility,
measured as the standard deviation of real year-on-year GDP growth
over 1974-2005, and each country’s sectoral concentration ratio in
2005, measured as the HHI for output by sector reported by official
statistics bureaus of sampled economies.
For the sake of robustness and self-discovery, I reproduce the
Booz Allen approach using a larger sample size (adding several
emerging market countries, namely Brazil, South Africa and Poland),
and extending the time horizon from 1974-2005 to 1970-2008. Using
sectoral output by country from the United Nations Statistics
Division (UNSD) National Accounts Official Country Data, I confirm
the Booz Allen result with more statistically significant evidence
of a strong positive relationship between a country’s level of
economic concentration and its growth volatility. To be sure, I
also use time-series data from one oil economy (United Arab
Emirates) and regress year-on-year real GDP growth on year-on-year
changes in the spot oil price. As expected, the correlation between
output and oil prices is strong enough to suggest that volatility
in the oil sector extends to the economy as a whole (see Figure
2).
The Booz Allen study concludes with a cross-sectional regression
of “risk-adjusted economic performance” on “sectoral
diversification.” The authors measure risk-adjusted performance by
dividing each country’s mean real GDP growth by its growth
volatility for the period of 1974-2005. Diversification, on the
other hand, is measured as the inverse of the concentration ratio
(HHI) for sectoral output. The results suggest a strong positive
relationship whereby long-term, risk-adjusted, real economic growth
varies as a function of sectoral diversification (see Figures 3a
and 3b).
The findings of Abouchakra, Moujaes, Najjar and Shediac (2008)
are significant as they corroborate the findings of Imbs and
Wacziarg and provide additional evidence of the importance of
diversification for development. Moreover, they offer convincing
evidence that the range of countries that can benefit from
productive diversification should be extended to include both those
with an income per capita less than $9,000 and those plagued by the
economic growth volatility associated with high sectoral
concentration. For example, while oil and gas-based economies such
as Qatar and the United Arab Emirates (UAE) have incomes per capita
upwards of $30,000, diversification can nevertheless enable
long-term growth by mitigating the exposure of their economies to
volatile oil and gas prices.
b.Industrial Policies, Institution-Building and
Diversification
Recognizing the clear benefits of productive diversification, a
growing body of literature offers a variety of insights into the
keys to facilitating the diversification process and unlocking
sustainable growth, namely industrial policies and
institution-building. While recent literature on the benefits of
diversification is relatively consistent, the industrial policy and
institutional implications of these benefits are subject to
substantial controversy. As noted by Cimoli, Dosi and Stiglitz
(2009),
“There was a time when ‘industrial policies’, for both developed
and developing countries, were bad words not to be spoken either in
public or in private by respectable people. It was a time of the
(in)famous ‘Washington Consensus’ on development – dominant among
international policy markers in the last part of the twentieth
century – with its market fundamentalism, made of an invariant
recipe good for all macro diseases (less government, fiscal sweat
and tears, privatizations, etc.) in turn grounded in a very naïve
and blackboxed microeconomics (‘the market will take care of
itself… hence do not mess around with micro behaviors’).”
In view of the historical shortfalls of market fundamentalism
(needless to mention the global financial system meltdown in 2008),
the World Bank and many leading economist and policymakers have
begun to articulate and defend “New Industrial Policy,” a set of
innovative interventions which is distinct from the “old”
industrial policies of the 1980s and 1990s and capable of avoiding
the pitfalls of “picking winners.”
A complete review of the literature on “old” and “new”
industrial policy is beyond the scope of this paper, as it would
encompass an expansive array of policy areas, including “infant
industry support, trade policies, science and technology policies,
public procurement, policies affecting foreign direct investment,
intellectual property rights, and the allocation of financial
resources.” Instead, for the purposes of this paper, it suffices to
present three key corollaries of recent literature on New
Industrial Policy. First, that “catching up” with advanced
countries entails the accumulation of capabilities via rapid and
sustained productive diversification; second, that this
accumulation necessitates substantial doses of
institution-building; and third, that industrial policies must
build good path dependencies when addressing patterns of sectoral
diversification throughout the development process.
Many recent contributions have been made to the body of
literature surrounding the importance of “building capabilities”
for development. Cimoli, Dosi, Nelson, and Stiglitz (2009)
summarize these recent contributions, concluding that the
transformation of traditional, rural economies into economies
driven by industrial activities requires the accumulation of
“problem-solving knowledge embodied in organizations – concerning,
for example, production technologies, marketing, labor relations,
as well as ‘dynamic capabilities’ of search and learning.” In
addition, Cimoli, Dosi and Stiglitz (2009) conclude that as the
more rapid and sustained accumulation capabilities tends to
correspond to more rapid growth, countries ought to pursue the most
direct and expedient path of accumulation as possible. This
conclusion is consistent with the ground-breaking literature
generated by Hausmann and Rodrik (2006), which argues that a key to
unleashing sustainable growth is the rapid discovery of new
productive activities. In fact, the notion that a country’s rate of
productive diversification ought to be maximized is either an
implicit or explicit assumption underpinning most recent
contributions to industrial policy literature, including the
collection of World Bank essays on economic diversification edited
by Newfarmer, Shaw and Walkenhorst (2009), as well as the Policy
Dialogue Series, “The Political Economy of Capabilities
Accumulation,” edited by Cimoli, Dosi, and Stiglitz (2009). While
some authors, including Rodrik (2006) and Abouchakra, Moujaes,
Najjar and Shediac (2008), explicitly advocate for prioritization
of binding constraints on growth and emphasize the importance of
carefully timing the transition toward an innovation-based economy,
the existing industrial policy literature offers few additional
insights into the appropriate pace of productive diversification or
the hazards of rapid diversification. No speed limits are
recommended.
Governments play a key role in shepherding the productive
diversification process, given that a market economy alone is not
sufficient for the rapid catching-up of less developed countries
with advanced countries. As argued by Khan and Blankenburg (2009),
“institution-building” has been critical in explaining the
successful emergence of many newly industrialized countries. Citing
a laundry list of historical examples, these authors highlight the
importance of the state as a leader in correcting private sector
coordination failures and providing the enabling conditions under
which economies can structurally transform from less productive to
more productive industrial activities. In many cases, the absence
or under-performance of key institutions of economic development
represents the most binding constraint on a country’s growth, and
the removal of this constraint necessitates the mobilization of
substantial human and financial resources for the design and
implementation of new development policies, and for economic
governance in general. While current industrial policy literature
underscores the importance and general difficulty of
institution-building, however, the precise resource and capacity
requirements for governments to shepherd a successful
diversification process remain unclear.
A third important corollary of recent industrial policy
literature is that the way forward for less developed countries, in
the sense of targeting specific industrial activities in the
diversification process, depends on those countries’ historical
paths of capabilities accumulation. Hausmann and Rodrik (2006) as
well as Cimoli, Dosi, and Stiglitz (2009) emphasize such “path
dependency” as fundamental to a “development as a process”
paradigm, and encourage policymakers to pursue incremental
development policies that target new productive activities that
relate to existing productive activities. More specifically,
characterizing such activities in so-called “product space,”
Hidalgo, et al. (2007) measure the relatedness of economic
activities (exports, in particular) as the minimum of the pair-wise
conditional probabilities of a country exporting a good given that
it exports another. This “network of relatedness” between products,
according to the authors, represents a roadmap for countries to
move from less productive to more productive activities by
traversing empirically feasible distances in product space.
However, the notion that a country would encounter pitfalls in
traversing empirically infeasible paths through product space –
adopting industrial policies that do not account for past
accumulation of capabilities – is only an implicit implication of
Hidalgo, et al.’s model.
III. Motivation for this Study
An emerging conventional wisdom of industrial policymaking is
that governments of less developed countries should seek to
diversify their economies quickly, immediately, and to the greatest
extent possible. Moreover, as facilitators of this process,
policymakers should identify and prioritize strategic industrial
sectors and diversification initiatives that link existing
capabilities to the pursuit of new productive activities. A closer
look at the literature, however, reveals several gaps in recent
industrial policy insights.
Recent industrial policy literature has neglected to discuss the
appropriate pace of and necessary government resources for
successful diversification. What are the limits of rapid economic
diversification? What are the pitfalls of aggressive growth in new
industries? Is there a sustainable rate at which developing
countries can expect to “catch up” with more advanced countries? If
institution-building is so important, then what does it take,
namely in terms of human resources, for a government to shepherd a
successful diversification process?
The answers to these questions would complement and enhance
existing literature on industrial development in several ways.
First, an empirical analysis of the rates at which advanced and
newly industrialized countries have successfully diversified their
economies would serve to manage less developed countries’
governments’ expectations of what growth and diversification
targets are realistic and achievable. Second, a case analysis
highlighting the risks of rapid diversification would serve as a
cautionary tale with helpful lessons for countries that seek to
launch national economic diversification strategies in the future.
Third, the combination of a horizontal, cross-country perspective
and lessons learned from a vertical, in-depth case study would
provide further insight into the nature and requirements of
economic diversification itself, as well as a basis for
articulating crucial research questions for further inquiry in an
emerging and important body of literature on economic
development.
IV. Research Design
To assess the limits and pitfalls of rapid economic
diversification, I adopt a two-part research design. Looking across
countries, I first examine time-series data to assess trends in the
pace and labor requirements of diversification. Seeking to evaluate
the relationship between diversification and public sector
employment, in particular, I use cross-sectional country data to
regress growth in public sector employment on growth in the level
of economic diversification. As such, the unit of analysis for this
component of my research design is “country diversification years,”
where the level of diversification of a country’s economy is
calculated as one less the concentration index (HHI) for output by
standard economic sector according to the United Nations
Statistical Division.
I select country cases for statistical analysis on three bases.
First and foremost, I ensure sufficient variance in the study
variable by sampling countries with both high and low levels of
economic diversification. On the high side, I examine the Group of
Seven (G7) advanced and diversified economies (Canada, France,
Germany, Italy, Japan, United Kingdom, and United States). On the
low side, I select relatively concentrated emerging economies
(namely Brazil, Poland, Mexico, Russia, South Africa and the United
Arab Emirates). I also select the low-side countries on the basis
of data availability. Finally, for the sake of sample size, I
include several “recent diversifiers,” identified by Abouchakra,
Moujaes, Najjar and Shediac (2008) as South Korea, New Zealand,
Norway and Hong Kong. The complete sample of selected countries
thus includes concentrated economies and both recent and
established diversified economies.
For the second part of my research design, I select a critical
case from cross-sectional analysis results. Seeking to assess the
country-specific causal logic that connects diversification and
public sector employment, I collect and analyze data for a recent
case of extreme diversification, the Emirate of Abu Dhabi.
Specifically, I test three hypotheses: first, that rapid
diversification has corresponded to a disproportionate share of
citizens working in government; second, that growth in public
sector employment stems in particular from core institutions of
economic development (departments of finance and economy); and
third, that trends in the price of labor (wages) reflect the
relatively larger demand for local employees in government than
local employees in the private sector.
V.Panel and Cross-sectional Data Analysis
From 1970 to 2008, the selected countries generally trended
upwards in terms of diversification, with some heterogeneity in the
specific pattern of across countries (see Figure 4). The Emirate of
Abu Dhabi is expressed both as part of and independent from the
United Arab Emirates to illustrate the country’s internal
heterogeneity. Previously concentrated primarily in the oil sector,
Abu Dhabi’s economy has diversified at a rapid pace relative to
benchmark countries, with its diversification index nearly doubling
between 1975 and 1995 while other selected countries’ indices
increased by around 10 percent. Hong Kong also stands out among
selected countries with its level of diversification increasing by
nearly 15 percent in five years (1988 to 1993). Meanwhile, the
process of diversification has slowed in relatively advanced
countries (Norway, France, and United Kingdom) with the exception
of Japan, whose process was sustained between 1970 and 2000.
More recently, Abu Dhabi’s economy appears to have reversed its
path of diversification. However, the relative size of the
Emirate’s oil sector is unfairly over-stated in real terms, owing
to skyrocketing oil prices after 1995 relative to non-oil prices.
Abu Dhabi’s reported aggregate GDP deflator does not reflect this
sector-specific inflation, and sector-specific inflation data are
unavailable. I therefore use data from the British Petroleum
publication, “Statistical Review of World Energy,” for growth in
oil barrels produced as a proxy for real growth in Abu Dhabi’s oil
sector. While continuing to use Abu Dhabi’s GDP deflator to
calculate real growth in non-oil sectors, I find that the Emirate’s
continued pursuit of diversification is apparent.
Turning to trends in labor force diversification, Abu Dhabi and
Hong Kong stand out again, now with surprisingly large shares of
national employees working in the public sector. At first glance,
this finding runs counter to intuition as one might expect to see
the public sector decline in its share of total employment with the
rapid creation of jobs in new economic sectors. In Abu Dhabi, over
90 percent of national employees work in the public sector.
Likewise, public sector employees in Hong Kong increased from 15
percent to over 25 percent of national employees over the full
course of its period of rapid diversification (1988 to 2000).
Meanwhile, and more intuitively, public sector employment in other
countries declined or remained relatively low and constant as
growth in their respective levels of diversification was relatively
less pronounced than Abu Dhabi. Thus, time series data for
diversification and public sector employment across countries
preliminarily beg the question of how a national labor force could
remain so highly concentrated in the public sector, in spite of its
rapid pace of economic diversification.
A better understanding of the relationship between labor and
economic diversification – specifically, the public employment
requirements of rapid diversification – requires a closer look at
trends in public sector employment across countries and over time.
As such, for each selected emerging market or advanced country
economy, I identify the 10-year time period during which the
absolute pace of diversification (increasing or decreasing,
depending upon the country) was maximized between 1970 and 2005.
These time periods are chosen to reflect periods of rapid change in
order to achieve sufficient variance in the compound annual growth
rate (CAGR) of the diversification index across countries. I treat
this rate as an independent variable for regression analysis. For
the dependent variable, I determine the CAGR for public sector
employment per country’s corresponding time period. Then,
controlling for population growth, I regress growth in public
sector employment on growth in the diversification index (see
Figure 5). Population growth is used as a control variable as the
number of government employees is intuitively correlated with the
size of a country’s population. Without controlling for population
growth, one would expect to discover a positive relationship
between public sector employment and diversification as the
population growth rate for most countries is positive.
The results of this regression analysis show statistically
significant evidence of a positive relationship between public
sector employment and diversification. That is, with confidence at
the 99 percent level, one cannot reject the null hypothesis that
there is a relationship between public sector employment and
economic diversification. Interestingly, Germany, South Korea and,
to a lesser extent, the United States, which all exhibited negative
diversification index growth, all also exhibited negative public
sector employment growth over the corresponding period. UAE and
Hong Kong, on the other hand, continue to stand out with relatively
high diversification and public sector employment growth in the
extreme. Looking across all sampled countries, regression results
suggest that if a country’s diversification index increases by just
0.1 percent in a given year, then one may expect total employment
in the public sector to increase by approximately 1.5 percent. One
explanation for this correspondence is that the diversification of
an economy, in addition to its size, increases the amount of labor
required for economic governance. The precise causal logic for this
explanation, however, requires a more in-depth look at a particular
case where an economy rapidly diversified.
VI. Abu Dhabi Case Analysis
In 2006, His Highness Sheikh Mohamed bin Zayed Al Nahyan, Crown
Prince of Abu Dhabi and Chairman of the Executive Council, mandated
the General Secretariat of the Executive Council, the Abu Dhabi
Council for Economic Development and the Department of Planning and
Economy to develop a long-term economic vision for the Emirate.
Between 2006 and 2008, a joint task force of stakeholders from the
public sector and private sector conducted an assessment of the key
enablers for economic growth and created a comprehensive long-term
economic vision, with explicit targets, to guide the evolution of
the Abu Dhabi economy through to the year 2030. Published in August
2007, the Abu Dhabi Economic Vision 2030 represents a roadmap for
the Emirate’s economic progress. In particular, the Vision strives
to achieve effective economic transformation of the Emirate’s
economic base and a sustainable and diversified, high value-added
economy by 2030.
Specific targets include a fourfold increase in real GDP from
2008 to 2030, and an increase in non-oil sectors’ contribution to
GDP from 42% to 64% over the same period, with growth in non-oil
sectors amounting to 8.6 percent, year-on-year (see Figure 6). The
oil sector is also targeted for growth, albeit at 4.1 percent, year
on year. Abu Dhabi intends to achieve these targets through the
effective expansion of 13 strategic economic sectors. These sectors
are expected to form the Emirate’s engines of economic growth and
diversification:
· Energy (Oil and Gas)
· Petrochemicals
· Metals
· Aviation, Aerospace and Defense
· Pharmaceuticals, Biotechnology and Life Sciences
· Tourism
· Healthcare Equipment and Services
· Transportation, Trade, and Logistics
· Education
· Media
· Financial Services
· Telecommunication services
With respect to non-oil sectors, the goal is to reach
equilibrium in non-oil trade by 2028, thereby instilling extra
depth within the structure of the economy.
As previously noted, Abu Dhabi has made major strides in growing
its non-oil economic sectors, increasing its economic
diversification index by nearly twofold between 1975 and 2005 (see
Figure 7). In spite of such progress, however, the Emirate’s
national employment base has not followed suit. Jobs in emerging
economic sectors are largely seized and occupied by expatriate
employees while the vast majority of national employees (93
percent) work in government (see Figure 8). Over time, this
disparity has led to an alarming demographic imbalance in Abu Dhabi
whereby Emirati nationals increasingly depend upon non-nationals to
deliver the economic output envisioned by the Emirate’s
leadership.
At least four viewpoints have been expressed in the literature
regarding the reason for this growing imbalance. The first is that
locals possess a comparative advantage in pursuit of public sector
jobs as opposed to private sector jobs. Many countries, Abu Dhabi
included, require that certain positions or a certain percentage of
total positions in government must be held by an employee with
local citizenship. This view, however, does not explain the rapid
growth in the total number of government positions.
Others point to a more harsh explanation, suggesting that
private sector jobs are too difficult, dangerous, or dirty for
national employees, and highlighting a mis-match between the
education of nationals and the job descriptions and requirements of
positions in the private sector. This hypothesis would be
corroborated with evidence of a high degree of unemployment among
nationals. As noted by the UAE National Human Resource Development
and Employment Authority (Tanmia) in its “Human Resource Report”
(2005), there are no official statistics available about the exact
number of unemployed nationals in the UAE. However, approximately
11,000 nationals (the equivalent of 4.9 percent of total national
employees in the country) self-identified as jobseekers in 2004,
citing unattractive or prohibitive employment and wage policies
implemented by private sector firms. Assuming that the demography
of national jobseekers mirrors that of the unemployed, then this
evidence would seem to suggest an excess supply of nationals
relative to the demand for national labor in either the public
sector or the private sector. However, “total jobseekers” is not
necessarily a robust measure of unemployment, and even if the
equivalent of 4.9 percent of total national employees were
unemployed, structural unemployment (chronic or inherent
joblessness) would comprise some potentially large fraction of this
figure.
A third explanation that has been offered for high concentration
of nationals in Abu Dhabi’s public sector relates to domestic
political economy. Although the Emirate has made strides in recent
years toward a Western style of democracy, having held its
first-ever limited elections to select half the members of the
Federal National Council in 2006, Abu Dhabi nevertheless retains
many characteristics of its political origins. The US Department of
State (2007) observes that the UAE has no political parties, and
its rulers hold power on the basis of their dynastic position and
their legitimacy in a system of tribal consensus. Moreover, in the
absence of taxation, nationals have little say or interest in
government. The large and growing number of jobs in government may
actually reflect the UAE Federal Monarchy’s efforts to appease its
citizens with employment security and both large and steady
government salaries. The non-profit Transparency International
(2010) recognizes this style of governance as prevalent and
widespread across the Middle East and North Africa (MENA), deeply
rooted in “the institutional infrastructure of the public sector
(typically very large, overstaffed with low salaries),” and
emerging as a result of “the relatively limited opportunities for
public participation.”
A fourth explanation offered for Abu Dhabi’s national employment
imbalance, related to the third, concerns the incentive for
nationals to seek the benefits of corruption as a public official.
Like most countries in the MENA region, UAE ranks poorly in terms
of public accountability, as measured by Transparency International
(2009) in terms of “access to information” and “holding leaders
accountable for their actions.” On the other hand, UAE has improved
its ranking in terms of “perceived corruption,” now 30th and among
the least corrupt countries out of Transparency International’s
sample of 180 in 2009. The US Department of State (2010) also views
“no evidence that corruption of public officials [in the UAE] is a
systemic problem,” in spite of UAE authorities’ ongoing
investigation of several high-profile corruption cases and recent
dismissal of several senior Emirati officials.
It is certainly possible that, in the case of Abu Dhabi, other
factors may have contributed to the concentration of national
employees in the public sector. However, the issue of whether or
not public sector job creation stemming from diversification is
sufficient to mitigate unemployment is outside the scope of this
paper. And while political explanations shed some light on Abu
Dhabi’s unusual situation, their explanatory power is relatively
difficult to ascertain. The pressing economic question remains: to
what extent has Abu Dhabi’s rapid economic diversification caused
an increase in public sector employment for nationals?
To address this question, I examine data collected from the Abu
Dhabi Government’s employee database through interviews with staff
members of Abu Dhabi’s Executive Council General Secretariat. To
test the hypothesis that rapid economic diversification uniquely
resulted in rapid growth in public sector employment, I compare the
employment base of the Abu Dhabi Government’s core institutions of
economic development (defined as the Departments of Finance and
Economic Development) with the employment base of the rest of the
public sector. Over 2005 and 2006, nearly 25 percent of all new
public sector employees entered as employees of either the
Department of Finance or the Department of Economic Development
(see Figure 9). Moreover, from 2004 to 2006, the CAGR for total
employees in these two institutions (23.3 percent, year-on-year)
was over 10 times the CAGR for all other public sector institutions
combined (1.8 percent, year-on-year). Nationals also comprised the
vast majority of these new employees, representing 95 percent of
all new employees in core institutions of economic development and
85 percent of all new employees in other government
institutions.
Within these institutions, new Emirati employees are mainly
hired to facilitate and regulate the set up and operation of new
firms in the Emirate, as evidenced by the concentration of new
employees in licensing, accounting and inspection functions (see
Figure 10). In fact, in 2005 and 2006, new Emirati employees
serving these particular functions comprised over two-thirds of new
Emirati employees in the Department of Finance and almost half in
the Department of Economic Development. In sum, it is apparent in
the case of Abu Dhabi that growth in public sector employment has
been uniquely concentrated in the institutions and specific
occupations associated with the Emirate’s diversification
ambitions.
If demand for national employees in government outstrips the
demand for national employees in the public sector, then wages
ought to reflect a disparity between public and private sector work
opportunities. Although unique wage data for nationals in the
public sector are unavailable, the disparity can be inferred from
the overall wage distribution for nationals as the bulk of
nationals work in public sector. In a 2006 household survey
conducted by Pan Arab Research Center (PARC), the average wage for
UAE nationals (around 10,000 AED or $36,700 USD per month) was
found to exceed the average wage for Arab expatriates by a factor
of 2.0 and non-Arab expatriates by a factor of at least 3.0 (see
Figure 11). While these data do not provide strong evidence of
public sector demand for national employees, as sampling biases and
employment assumptions limit the robustness of a general
extrapolation regarding wage disparities, they are not inconsistent
with the hypothesis that nationals are offered special financial
incentives to work in government.
A more robust inference regarding this disparity can be made
using compensation and employment data from the United Nations
Statistical Division. Between 2001 and 2007, these data reflect a
growing divergence between public and private sectors both in terms
of compensation per employee and total employees per sector (see
Figure 12). With respect to compensation, thanks to the recent
passage of laws increasing the salaries for public sector
employees, the 2001-2007 CAGR for compensation per public sector
employee (6.4 percent) outpaced the corresponding CAGR for the
private sector (5.8 percent). On the other hand, driven by the
rapid influx of expatriate employees, the CAGR for total private
sector employment (8.4 percent) outpaced the corresponding CAGR for
the public sector (7.4 percent). Thus, in spite of the effects of
rapid growth in private employment on private wages, the government
continued to pass laws that made public sector employment
opportunities more attractive. In 2005, for example, the
International Monetary Fund (IMF) observed that the President of
the UAE, Sheikh Khalifa bin Zayed Al Nahyan, increased salaries by
25 percent for nationals in the Federal and Abu Dhabi governments,
after which other major Emirates adopted similar laws. IMF noted
that the new law would “increase the reservation wage in the public
sector” and “adversely affect the incentive structure and
discourage nationals to seek jobs in the private sector.”
The apparent efforts of the UAE government to promote growth in
public sector employment are in direct conflict with other
government interventions to increase the participation of nationals
in the private sector. Launched in the year 2000, the so-called
Emiratization program, as described by Morris (2005), targets
selected industries that the government considers suitable for
nationals and sets national employment quotas for the firms within
these industries. The National Human Resources Development and
Employment Authority, also called Tanmia, has been tasked to
champion the Emiratization program initiatives, aiming specifically
to:
· Create job opportunities for UAE National Workforce
· Reduce the unemployment ratio
· Enhance the Skills and productivity of the National
workforce
· Recommend relevant policies to the UAE Federal Government
In terms of success, Morris (2005) states that “none of the
industries have achieved quota,” but recognizes that Emiratization
has been more successful in some sectors than others. On the other
hand, Shah (2006) argues that gains in the participation of
national employees in some sectors may be counterbalanced by a
disproportionate influx of expatriates. In sum, the Abu Dhabi
government’s efforts to nationalize the private sector employment
base are likely to have been hampered by simultaneous efforts to
meet the public sector employment requirements of the country’s
economic diversification ambitions.
Cross-country trends exhibit a statistically significant
correlation between the pace of economic diversification and growth
in public sector employment. The case of Abu Dhabi reflects a
causal relationship between these variables, as the Emirate’s
diversification efforts have contributed to rapid employment growth
in core institutions of economic development. In light of the major
and growing wage disparity between nationals in government and
non-nationals in the private sector, it is also likely that the
demand for nationals to work in the public sector outweighs the
supply.
VII. Implications
With limited foresight and capacity to appreciate the growing
complexity of a diversifying economy, policy planners must take
extra care to avoid the pitfalls of rapid diversification. In
particular, the potential demographic imbalances associated with
rapid economic diversification pose significant hazards for
national security and economic development. These hazards have
greater potential to create problems with a rapid pace of
diversification because they can develop more quickly and there is
a shortened reaction time.
The national security risks stemming from extreme dependence
upon foreign labor are clear. In the UAE, where expatriates
represent upwards of 95 percent of all private sector employees,
government officials have already recognized this hazard. For
example, during the April 2008 conference on national identity in
Abu Dhabi, Lieutenant General Dahi Khalfan Tamim, Dubai Police
Chief, noting that “the situation is truly disastrous with foreign
workers destroying and looting public and private properties in the
name of demanding rights.” Dahi later continued, arguing that “the
imbalance in the population structure is a huge challenge that
requires long term, medium term and short term strategies to reduce
foreign workers from any single country to not more than 25 percent
of the UAE population.”
Future difficulties in covering the cost of governance
represents a related national security hazard. At present, like
most of the Middle East states the government of the UAE receives
most of its revenues from the oil industry. Government employee
salaries are largely paid out of these revenues as there is no
taxation on individual income, investment income, property rental,
wealth, capital gains, inheritance or gifts, property, or sales
(with the exception of certain products, such as liquor and
cigarettes). In the face of finite oil reserves and oil price
volatility, however, this situation begs the question of
sustainability.
One can imagine the discontent of expatriates in the private
sector that would manifest if the UAE were to impose taxation to
cover the salaries and benefits of public sector employees. Indeed,
after years of prodding from the IMF to diversify their revenue
base, Global Insight (2010) reports that draft value-added tax
(VAT) proposals have been referred to the federal level. Amy Chua
(2004) articulates the potential magnitude and severity of this
discontent in a series of country case studies of “backlash against
market-dominant minorities,” citing as possibilities both expulsion
and genocide. Of course, UAE is unlikely to face such catastrophic
implications in the short or medium-term. Nevertheless, the country
must weigh the rewards of growth and diversification against the
tangible, short-term risks of social malaise and disorder.
In terms of economic development, Abu Dhabi offers practical
lessons for other countries and major cities. The fact that Abu
Dhabi identified 13 industries as “strategic” – a spectrum of
industries that nearly comprises the entire economy – should serve
as a reminder that policy planners need to prioritize their growth
ambitions. Ignoring the notion and importance of path dependence in
productive transformation, efforts to build economic sectors that
require capabilities unrelated to existing sectors risk wasting
policymakers’ time and investors’ money. A clear set of industrial
development priorities would help to ensure that diversification
proceeds at a reasonable pace and in a particular direction that
creates maximum value for society. This final point resonates with
the advice offered by Rodrik (2005), who summarizes the
conventional approach to economic reform and industrial development
as one of “do whatever you can, as much as you can, as quickly as
you can,” while noting that “as a matter of basic economics this
represents a faulty strategy.”
As the list of hazards for security and development goes on, the
importance of the pace of productive diversification for economic
development becomes increasingly apparent. A more rapid pace of
diversification increases the likelihood that policymakers will
fail to anticipate these hazards, just as a speeding driver is more
prone to traffic accidents and more serious injuries. Likewise,
just as the slowest driver on a highway guarantees a late arrival,
a slow pace of diversification may unnecessarily constrain a
country’s development process.
VIII. Policy Prescriptions
While recognizing diversification as a key enabler of
development, policymakers must also account for the hazards of
rapid diversification and adjust accordingly. Of course,
policymakers can slow the pace of diversification and development
and lower the risk of associated pitfalls. Alternatively, in
anticipation of these pitfalls, policymakers can adopt pre-emptive
countermeasures as they continue to pursue their development
aspirations. Continuing to draw lessons from the case of Abu Dhabi,
I offer two such countermeasures for enabling the sustainable
transformation of concentrated economies.
First, in regards to demographic imbalances and security
implications, policymakers may continue to pursue an aggressive
diversification agenda to the extent that they can avoid an equally
aggressive effort to employ nationals in the public sector. While
this can be achieved, to a limited extent, by limiting the pace of
diversification, it can also be achieved by adopting a more liberal
practice of allowing non-nationals to serve in public
administration or attain citizenship. Mitigation of nationals’
comparative advantage in the public sector job market and
increasing overall competition would also serve to enhance
government performance (not to mention the probable reduction in
the cost of governance) as more qualified candidates would be
matched to available positions. Furthermore, greater diversity of
backgrounds and perspectives in the policymaking process,
especially if coupled with greater transparency, would serve to
enhance the efficacy of public policies in general. A multi-ethnic
society inherently avoids such demographic imbalances and security
risks as are increasingly present in the UAE.
Arguably, the value of national identity and the distinctiveness
of a national culture may render the transition to a more diverse,
multi-ethnic society either piecemeal or infeasible. Or perhaps the
human and financial resources to invest in the governance of
economic diversification are too scarce to achieve the ambitious
visions of a state’s leadership. In either case, a framework is
needed to facilitate the identification of industrial development
priorities and the management of industrial performance.
In 2005, the International Trade Center (ITC), the joint agency
of the World Trade Organization and the United Nations, presented
one such framework for managing the implementation of a National
Export Strategy. Expanding the scope of ITC’s framework to include
goods and services for domestic consumption, I propose a similar
framework for managing the implementation of a National Industrial
Development Strategy (see Figure 13). In the spirit of the
“Balanced Scorecard” approach set forth by Kaplan and Norton
(1996), the proposed industrial performance management system
prioritizes the concerns of a holistic set of stakeholders,
namely:
1. Entities that enable industrial processes, e.g., public
utilities, telecommunication providers, and educational
institutions;
2. Current and aspiring enterprises along each industry’s value
chain;
3. Associations of enterprises and their domestic and
international clients; and,
4. Representatives of the interests of society at large, e.g.,
politicians, civil society, and the donor community.
Looking across these four dimensions of key entities and
concerns, policymakers can identify and link a balanced set of
priority areas and targets to form a roadmap for industrial
development (see Figure 14). Policymakers should seek the feedback
of these entities in the priority area identification and targeting
process, and later hold them accountable through measurement of
progress against their commitments. The use of such a system for
economic governance can thereby translate economic diversification
visions into essential and actionable initiatives without either
overburdening public administration or overheating the economy. By
focusing policymakers’ attention on the most value-adding
initiatives for productive transformation, this proposal would help
to unlock long-term economic growth.
IX. Conclusion
This paper finds statistically significant evidence that the
pace of economic diversification is relevant to the success of an
economic development effort. On one hand, diversification is a key
enabler of development and, as such, its pace should not be too
slow. However, panel data from a diverse sample of 16 countries
reflect a strong correlation between changes in diversification and
changes in the manpower requirements of public administration.
Further inquiry regarding pace of and approach to productive
diversification should focus on several key areas. First and
foremost, future research should examine the relationship between
the labor requirements of economic governance and alternative
measures of economic diversification. As sectoral data from UNSD
are relatively granular when compared with alternatives, the
methodology adopted in this paper would be enhanced with the use of
more detailed datasets and advanced indices, such as those
identified Imbs and Wacziarg (2003). Second, evidence from a larger
sample of countries would help to verify the findings of this
paper. Third, analysis of additional country case studies is
needed, as others cases may be less vulnerable than Abu Dhabi to
alternative, political explanations for rapid public sector
employment growth. An analysis of Hong Kong, in particular, would
help to further trace the effects of rapid diversification.
Finally, a case study of a much more populous country than either
Abu Dhabi or Hong Kong would serve to verify the extent to which
the causal relationship described in this study can be extrapolated
to a more diverse array of countries.
In view of apparently substantial labor requirements of rapid
economic diversification, policymakers should take into account the
availability of human resources and the funding of those resources
as they plan to diversify their economies. The public sector is an
active and significant participant in the labor market, and the
process of planning and implementing industrial and economic
development policies, as it demands greater resources for economic
governance, can itself change the economic landscape. Finally, the
security and development implications drawn from the demographic
imbalances in Abu Dhabi suggest a need for pre-emptive
countermeasures. Either by complementing diversification with a
transition to a diverse and multi-ethnic society, with greater
representation and transparency in government, or by defining a
roadmap of priorities for industrial development, policymakers in
concentrated and less developed economies can proceed to maximize
the pace of diversification and unlock long-term growth.
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Appendix
Global trends suggest a u-shaped relationship between economic
concentration and development
0.50
0.51
0.52
0.53
0.54
0.55
0.56
0.57
0.58
0.59
0.60
2,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,00013,00014,00015,000
Figure 1a: Sectoral Concentration vs. Income per Capita
(UNIDO 3-digit employment data)
Income per Capita
(US Dollars)
Income Midpoint
= $8,800
Sectoral Concentration Index
(in GINI index)
Source: Imbsand Wacziarg, 2003
0.50
0.51
0.52
0.53
0.54
0.55
0.56
0.57
0.58
0.59
0.60
2,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,00013,00014,00015,00016,00017,000
Figure 1b: Sectoral Concentration vs. Income per Capita
(UNIDO 3-digit value-added data, 2003)
Income per Capita
(US Dollars)
Sectoral Concentration Index
(in GINI index)
Income Midpoint
= $9,500
Source: Imbsand Wacziarg, 2003
Economic concentration is often associated with higher economic
growth volatility, especially in oil economies
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
0.11
0.12
0.340.320.300.280.260.240.220.200.180.160.140.120.10
Singapore
Japan
Ireland
South Korea
Canada
USA
UK
UAE
South Africa
Qatar
Poland
Oman
Norway
Kuwait
Italy
Germany
France
Hong Kong
Brazil
Bahrain
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
-50-40-30-20-1001020304050
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1993
1994
GDP Growth Volatility vs. Economic Concentration
(Cross-sectional data for selected countries)
Real GDP Growth vs. Oil Price Change
(Time-series data for UAE)
Year
-
on
-
year Real GDP Growth Volatility
(standard deviation, 1970
-
2008)
Economic Concentration Index
(Herfindahl-Hirschman index, 2005)
Year
-
on
-
year Real GDP Growth
(in %)
Year-on-year Change in Abu Dhabi Spot Oil Price
(in %)
Figure 2: Implications of Economic Concentration
y = 0.388 * x -0.362 R
2
= 0.54
(4.55) (-2.20) (t-statistic)
y = 0.361 * x + 4.337 R
2
= 0.66
(7.25) (4.37) (t-statistic)
Source: United Nations Statistics Division (UNSD) National Acco
unts Official Country Data; Global Insight; author ’s analysis
Using risk-adjusted real growth as a proxy for economic
performance…
Figure 3a: Real GDP Growth, Historical Volatility, and Risk
-adjusted Performance, 1974 -2005
…economic diversification is viewed as a key enabler of
sustainable economic development
Figure 3b: Relationship between Economic Diversification and Eco
nomic Sustainability
Looking across countries, however, rapid diversification has put
unexpected demands on human resources in the public sector
Trends in Economic Diversification
(Time-series data for selected countries)
Trends in Employment by Sector
(Time-series data for selected countries)
Figure 4: Economic Diversification and Public Sector
Employment
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
197019751980198519901995200020052010
UAE
Japan
France
Hong Kong
UK
Norway
Economic Diversification Index
(Difference between Concentration Index and Unity)
Abu Dhabi
(2)
Abu Dhabi
(1)
Notes:
(1)
Real growth in oil sector assumed
equal to growth in oil production,
1995-2005
(2)
Real growth in oil sector calculated
as function of nominal growth and
GDP deflator
Source: UNSD National Accounts Official Country Data; BP Statis
tical Review of World Energy, 2009; Abu Dhabi Statistical Yearbo
oks; author’s analysis
197019751980198519901995200020052010
8
6
4
2
28
92
12
14
16
18
22
24
26
94
10
20
0
Japan
Norway
UK
France
UAE
(all employees)
Hong Kong
Abu Dhabi
(nationals only)
Public Sector Employment
(in % total employees)
Cross country trends suggest that growth and diversification
efforts increase labor requirements of economic governance
Figure 5: Growth in Public Sector Employment vs. Economic Divers
ification
(Panel data for selected countries, 1970 -2005
(*)
)
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
-0.3-0.2-0.10.00.10.20.30.40.50.60.70.80.91.01.11.2
Mexico
South Korea
Japan
Italy
Germany
France
Hong Kong
Canada
Brazil
Abu Dhabi
USA
UK
UAE
Russia
Poland
Norway
New Zealand
Growth in Public Sector Employment
(in % CAGR over 10
-
year period)
Growth in Economic Diversification Index
(in % CAGR over 10-year period)
Note: Bubble size reflects percentage contri-
butionof public sector to total employment
Note: (*) Date ranges per country are consistent for dependent a
nd independent variables and reflect a 10 -year period of maximum
absolute change in diversification index
Source: UNSD National Accounts Official Country Data; Abu Dhabi
Statistical Yearbooks; author’s analysis
Selected Emerging Markets
and Transformation Economies
Abu Dhabi, UAE (not included in regression)
Group of 7 (G7) Countries
Y = 15.52 X -0.049 R
2
= 0.47
(2.89) (1.32) (t-statistic)
Note: model controls for population growth
Looking at the case of Abu Dhabi in particular, long-term
ambitions entail rapid growth in minority industries
Target Abu Dhabi Real GDP
–In Real 2005 USD Billion –
(2008-2030T
(1)
)
Figure 6: Abu Dhabi ’s 2030 Economic Development Vision
(ADEV)
2030
416
36%
64%
2008
104
58%
42%
Oil
Non-oil
(1) “T”refers to targeted years that fall within the scope of
the ADEV 2030; 5-year targets to be announced after socialization
and approval wi th DED Undersecretary
Source: Abu Dhabi Statistical Yearbook 2005; Abu Dhabi Economic
Vision 2030
CAGR (2008-2030)
8.6%
4.1%
6.5%
Historical trends reflect some progress toward the achievement
of Abu Dhabi’s vision of a diversified economy…
Agriculture, Forestry
& Fisheries
Mining, Quarrying & Energy
Construction, Electricity,
Water and Gas
Trade, Restaurants & Hotels
Transport & Communication
Manufacturing
Banking, Insurance, Finance,
Real Estate & Business Services
Government Services
Other Services
(*)
13%
10%
11%
76%
48%44%
59%
7%
10%
6%
6%
6%
12%
1975
0%
4%
2%
4%
1%
0%
9%
1%
8%
1985
4%
1%
5%
2005
6%
3%
4%
11%
3%
1995
1%
0%
12%
4%
7%
2%
Economic
Diversification
Index (EDI)
Note: (*) Other Services include community, social and personal
services, activities of private households as employers, and un
differentiated activities of private households, as
well as extraterritorial organizations and bodies
Source: Abu Dhabi Statistical Yearbook
21.0 31.1 43.3 77.9
0.41 0.72 0.76 0.62
Figure 7: GDP Breakdown by Economic Sector in Abu Dhabi
(in real 2005 US$ billions, 1975 -2005)
Economic Diversification Index (EDI) =
1 -(Economic Concentration Index)
…however, the public sector has captured the bulk of new
national entrants to the workforce
7%
93%
2005
7%
93%
1995
Private Sector
Public Sector
75,518
40,981
1995
32%
484,476
68%
77%
23%
Private Sector
711,220
2005
Public Sector
Total Employees
in Abu Dhabi
525,457 786,738
Figure 8: Employment in Abu Dhabi by Nationality and Sector
(in employees, 1995-2005)
CAGR (1995-2005)
6.3%
6.7%
6.3%
3.9%
5.2%
0.6%
4.1%
National
Employees
In Abu Dhabi
Non-national
Employees
In Abu Dhabi
Total
Total
Source: Abu Dhabi Statistical Yearbooks; author ’s analysis
In particular, economic development institutions have increased
public sector demand for national employees…
2%
Dept. of
Economic
Development
29%
71%
Ministry of
Presidential
Affairs
9242
93%
UAE Nationals
Other Nationalities
69
D.M.A.
Other
(1)
83%
17%
All Other
Depts.
(2)
73
95%
5%
Dept. of Finance
257
95%
5%
84%
16%
Dept. of Justice
111
Dept. of
Transport
51
80%
20%
D.M.A.
(1)
(Public Works)
63
84%
7%
D.M.A.
(1)
(Al Ain)
97
77%
23%
D.M.A.
(1)
(Abu Dhabi)
160
98%
16%
Figure 9: New Government Employees in Abu Dhabi by Nationality a
nd Department
(in current employees hired in 2005 or 2006 as of
12/31/2006)
Total
(1) D.M.A. = Department of Municipal Affairs; D.M.A. -Other
includes Agriculture, Forest Management, Antiquities, Tou rism,
Western Region
(2) Includes General Women’s Union, Cultural Foundation, Dept.
of Civil Service, and Office of the Ruler of the Eastern
Province
Source: Abu Dhabi General Secretariat (ADGS) interviews; author
’s analysis
Core Government
Institutions of Economic
Development (EDIs)
All Other Departments
(2)
Growth in Total Employees
(in % CAGR, 2004-2006)
Others
23.3%
1.8%
EDIs
Note: Depts. with zero new hires (2005-
2006) include Secretariat of the Executive
Board, National Consultative Council,
Protocol Dept., Dept. of Social Welfare,
and Ministry of Information/Culture
…many of whom are hired to conduct the licensing, accounting and
inspection functions of economic development institutions
Figure 10: New EmiratiEmployees in Abu Dhabi Government by
Department
(in % total Emiratishired in 2005 or 2006 as of 12/31/2006)
7%
7%
67%
Inspector of
Financial
Information
18%
Customs
Officer
Analyst / Accountant
/ Adviser
2%
Senior
Management
Other
11%
9%
16%
19%
Admin. Assistant
Licensing and
Inspection
21%
Analyst / Accountant
/ Adviser
25%
Commercial
Relations
Officer
Senior
Management
Other
Department of Finance Department of Economic Development
Wages reflect this demand, as UAE nationals are highly
compensated relative to non-nationals…
Figure 11: Household Income Distribution by Nationality in
UAE
(in % of survey respondents, 2006)
0
0
11
2
2
4
4
5
5
7
6
7
7
6
9
17
0
0
0
0
1
2
2
4
8
7
10
11
16
16
11
5
11
1
2
4
8
10
14
13
12
6
8
5
2
1
000
<20002001 -
3000
3001 -
4000
4001 -
5000
5001 -
6000
6001 -
7000
7001 -
8000
8001 -
9000
9001 -
10000
10001 -
12500
12501 -
15000
15001 -
20000
20001 -
25000
25001 -
30000
30001 -
40000
40001 -
50000
>50000
Non-Arab Expatriates
Arab Expatriates
UAE Nationals
Average Monthly Income of Household
(in UAE Dirhams)
Note: 3.67 Dirhams= 1 US Dollar; refusals and “Don’t
Know”responses comprised 18.9% of non -Arab expatriates, 7.6% of
Arab expatriates and 13.9% of national s
Source: Pan Arab Research Center (PARC) UAE Household Survey, 2
006
…and wage disparities adversely affect the incentive for
nationals to seek jobs in the private sector
Figure 12: Compensation vs. Employment by Sector in UAE
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2,2001,9001,700 2,400100 2,000 2,700300 2,6002,100200 1,8001,600
2,3004000 500 2,500
2001
2003
2005
2007
2001
2003
2005
2007
Total Employees by Sector
(in thousands of employees)
Average Monthly Compensation by Sector
(in UAE
Dirhams
per employee)
Note: (*) Includes public administration and defense, health and
social work, and other community, social and personal services;
excludes state-owned enterprises
Source: UNSD National Accounts Official Country Data; IMF Count
ry Report No. 05/269, August 2005; author ’s analysis
CAGR =
6.4%
Public Sector
(*)
Private Sector
CAGR = 7.4%
CAGR = 8.4%
CAGR =
5.8%
In 2005, the President of the UAE
announced an increase in salaries (25% for
nationals and 15% for non-nationals)
for Federal and Abu Dhabi’s government
employees
Growth in private sector
employment in UAE has
been driven primarily
by the rapid influx of
expatriates
Policymakers can focus their development ambitions by
prioritizing the concerns of key entities per industry
Figure 13: Performance Management System Dimensions for Economic
Governance
Industrial
Development
Stakeholder
Engagement
Industrial
Processes
Enabler
Requirements
2
3
4
1
Dimension
Key Entities Main Concerns
Outcomes
Capabilities
Politicians
Government
decision-makers
Civil society
Donor community
Enhancing sector
productivity
Contribution to the
national well-being
Sustainable
socio-economic
development
Sector associations
Sector advocacy
groups
Domestic/foreign
investors
Prospective
buyers/importers
Each sector’s
potential/aspiring
producers
Other enterprises
and players in each
sector’s value
chain
Public organ-
izationsin each
sector’s production
support network
Private organ-
izationsin each
sector’s production
support network
Satisfaction with
sector capabilities
Satisfaction with
enabling business
environment
Enhancing part-
icipationin Export
Strategy execution
Matching firms and
opportunities
Furthering comm-
ercialobjectives
Facilitating
industrial activities
and fulfilling needs
for support
Improving business
environment and
enabler require-
ments
Enhancing public
and private
capabilities and
competencies
Figure 13: Performance Management System Dimensions for Economic
Governance
Industrial
Development
Stakeholder
Engagement
Industrial
Processes
Enabler
Requirements
2
3
4
1
Dimension
Key Entities Main Concerns
Outcomes
Capabilities
Politicians
Government
decision-makers
Civil society
Donor community
Politicians
Government
decision-makers
Civil society
Donor community
Enhancing sector
productivity
Contribution to the
national well-being
Sustainable
socio-economic
development
Enhancing sector
productivity
Contribution to the
national well-being
Sustainable
socio-economic
development
Sector associations
Sector advocacy
groups
Domestic/foreign
investors
Prospective
buyers/importers
Sector associations
Sector advocacy
groups
Domestic/foreign
investors
Prospective
buyers/importers
Each sector’s
potential/aspiring
producers
Other enterprises
and players in each
sector’s value
chain
Each sector’s
potential/aspiring
producers
Other enterprises
and players in each
sector’s value
chain
Public organ-
izationsin each
sector’s production
support network
Private organ-
izationsin each
sector’s production
support network
Public organ-
izationsin each
sector’s production
support network
Private organ-
izationsin each
sector’s production
support network
Satisfaction with
sector capabilities
Satisfaction with
enabling business
environment
Enhancing part-
icipationin Export
Strategy execution
Satisfaction with
sector capabilities
Satisfaction with
enabling business
environment
Enhancing part-
icipationin Export
Strategy execution
Matching firms and
opportunities
Furthering comm-
ercialobjectives
Facilitating
industrial activities
and fulfilling needs
for support
Matching firms and
opportunities
Furthering comm-
ercialobjectives
Facilitating
industrial activities
and fulfilling needs
for support
Improving business
environment and
enabler require-
ments
Enhancing public
and private
capabilities and
competencies
Improving business
environment and
enabler require-
ments
Enhancing public
and private
capabilities and
competencies
Priority areas and associated targets would comprise a balanced
and holistic roadmap for industrial development
Industrial Development Aspirations
Logic Flow Between Priority Areas
Figure 14: Industrial Development Roadmap of Priority Areas and
Targets
Priority Area and Related Targets
Industrial
Development
Stakeholder
Engagement
Industrial
Processes
Enabler
Requirements
2
3
4
1
Priority Areas & Targets
per Dimension
Industrial Development Aspirations
Logic Flow Between Priority Areas
Figure 14: Industrial Development Roadmap of Priority Areas and
Targets
Priority Area and Related Targets
Industrial
Development
Stakeholder
Engagement
Industrial
Processes
Enabler
Requirements
2
3
4
1
Priority Areas & Targets
per Dimension
� “Overview of New Industrial and Innovation Policy,” World Bank
website (2010)
� Cimoli, Dosi and Stiglitz (2009).
� Unlike Abouchakra, et al. (2008), I calculate a
diversification index as a difference rather than an inverse; this
is because, like the HHI, the diversification remains distributed
between zero and one.
� “The Abu Dhabi Economic Vision 2030” (2008).
� Salama (2008).
� “Taxation Law in the UAE” (2010).
