Stagnant oil prices mean the GCC’s economic situation today does not look rosy, and the 2016 Global Innovation Index (GII) shows the region is standing still on innovation.

Several initiatives, such as Saudi Arabia’s Vision 2030 or UAE's Vision 2021, clearly aim to enhance the entrepreneurship environment, but with oil rents accounting for the clear majority of government revenues the stumbling price is narrowing options for financing extensive state support systems.

However, the quest for economic diversification away from merely oil has been mentioned in National Development Plans across the Gulf since the 1980s. So what has changed in the past five years?

A quick glance at 2016

The year 2016 shows that GCC countries are situated within the upper middle range of the Global Innovation Index ranking.

The UAE recovered from its slump last year and enjoys a leading position with an overall innovation rank of 41, closely followed by Saudi Arabia (49) and Qatar (50). Oman ranks lowest in the seven sub-indicators the index measures.all seven sub-indicators.

Interestingly enough, the UAE owes its position as frontrunner to its achievements in the innovation input index, which includes investments in the general business, political and regulatory environment, as well as in education and ICT infrastructure.

Yet, it remains on exactly the same rank as in the 2011 GII ranking due to its relatively low position in the innovation output ranking. This is astonishing given its strategy to remain competitive by attracting skilled labor from abroad, and forming innovative clusters within the city.

Five years and no clear improvements in the ecosystem

Analysing developments over the past five years, the GCC presents a sobering reality.

The only area with a consistent improvement is infrastructure, namely internet access and usage, as well as general infrastructure and ecological sustainability.

Sub-indices of institutions, human capital and research as well as business sophistication have all declined.

All countries show significant losses in their position in comparison to the 2011 ranking, except for Saudi Arabia which demonstrates a small gain in human capital and research.

The GII Report 2016 explicitly states that “despite these top ranks, and compared to their level of development, resource-rich countries in the region could rank higher”.

The authors attribute the presented shortcomings to ‘the resource curse’, a notion also entertained by the International Monetary Fund (IMF). It says repercussions of the resource curse are economic volatility, due to the reliance on oil, and the detrimental impact of relying on one environmental resource on governance and institutions.

The most controversial ranking in the report is the innovation output indicators. Though the UAE drastically improved its rank in the knowledge and technology outputs, the ranking in creative outputs drastically declined. The same is true for Saudi Arabia, but with less of a steep difference between 2011 and 2016 ranking.

Interestingly enough, Kuwait and Bahrain are the only GCC countries with a positive result in the ranking of the creative outputs - Bahrain more so than Kuwait.

There are some clear reasons for Bahrain’s success in the output indicators.

First, it is a relatively small country and possesses relatively limited oil reserves compared to its neighbours. That fueled an early diversification and interest in international partnerships, such as a Free Trade Agreement with the US. A service sector was developed early on and comprised roughly 60 percent of national GDP in 2015, according to the World Bank, and the country is among the top in the world with smartphone penetration over 100 percent and more than 70 percent social media adoption, according to McKinsey 2016.

Positive vs. negative future scenarios for the GCC

The GII report underlines one specific challenge that may be hindering the creation of local innovation ecosystems: the need to focus on the quality and continuity of the initiatives rather than simply on the amount.

Financial support is relatively easy to find in the financially sound Gulf countries, yet it is much harder to create a long-lasting, inclusive and creative entrepreneurial ecosystem. A thorough reform needs to tackle diverse actors within the economy, politics, academia and society, key elements of which Wamda has identified.

Aside from reforming legal, bureaucratic, and regulatory frameworks, the GCC should clearly focus on human capital development. A comprehensive educational reform seems to be one of the most important aspects to position the region for a more innovative economic system.

Education is the starting point to shape talent that will later fill the gaps in the local market. The curricula not only needs to be modernized but also focused on the fields of science, technology and maths next to creative subjects such as art.

Innovation is not a straightforward process but works best with an interdisciplinary collaboration domestically and within the region. Facilitating labor movement as well as intensifying collaboration among corporations and digital disrupters within the GCC, will create more localized innovation clusters and knowledge exchanges.

This will definitely not be an easy task but policymakers need to face the increasing demands from a large young and internet-savvy population looking to widen their employment opportunities.

Feature image via World Bank