Christine Lagarde, Managing Director, IMF, on planning for the future

The Gulf region has some of the world’s highest living standards and must continue to build on its gains. To do so, it needs to address and overcome three types of challenges: the challenges of the present, which include making sure the region can continue to support stability and growth in an uncertain world; the challenges of the future, or making sure the region can find new sources of productivity and prosperity for the 21st century; and the challenges of common global citizenship, or recognising that in this interconnected world, the problems of each country are the problems of all.

I will begin with the challenges of the present and how global changes affect the Gulf region. How exposed is the Gulf region to any turmoil in the rest of the world? The main links come through oil and gas. A negative shock would mean lower energy prices and probably lower oil and gas output. In turn, this weakens both external and fiscal accounts. Fortunately, there are two important factors that limit contagion from widespread adverse fallout. First, apart from oil, the region is still somewhat insulated from the global economy, even though trade and financial links have been increasing. Second, the region has strong policy defences. Of these, there are two main types: fiscal defences and defences against financial contagion. Starting with fiscal defences, the region is expected to run a fiscal surplus exceeding 9% of GDP for 2014. Overall, the strong fiscal position provides security and comfort. Should the economic situation deteriorate, the region can maintain or even increase government spending to counteract any private sector slowdown. This can be done quickly, through sizeable public investment programmes.

Ultimately, this is about saving for, and investing in, the future, for the benefit of the next generation. The region also maintains strong defences against financial contagion. Banks are generally in good shape, including in Kuwait, and they are well capitalised and liquid, as well as effectively regulated and supervised.

Let me now move to my second area, meeting the challenges of the future. This is about making sure that the living standards of your children and grandchildren meet or exceed the living standards of your own generation. This is a key issue in Kuwait and across the region. We all know that oil, the region’s most precious resource, will not last forever. That said, Kuwait has been an exemplary steward of its natural resources, using them to improve people’s lives. The region is also a financial centre and a hub for international trade and business services. Yet there is still a long way to go.

Diversification, including in Kuwait, is still in its infancy. The public wage bill is too high. Productivity, the key driver of long-term growth, has declined or stagnated. A key problem is that too few nationals seek work in the private sector. The rate of private sector job creation is expected to slow in the coming decades. Even without this slowdown, however, only a third to a half of nationals joining the labour force by 2018 would find employment in the private sector. This is true for Kuwait and for the Gulf countries more broadly. To move forward, the region needs to invest more in infrastructure and in training and education. Kuwait also needs to exploit its natural advantages, such as its favourable location between Europe and Asia, and its young, dynamic and highly motivated population. When it comes to investing in people, nothing is more important than enhancing the quality of education. Certainly, there have been great strides forward. The number of years students spend in school has risen considerably over the past decade, but there is still some distance to travel if nationals are to compete for high-paying jobs with the best and the brightest in the global economy.

Let me now turn to my third area, the challenges of our common global citizenship. I believe strongly that if countries cooperate and work together, then everybody does better. I know the GCC has been providing extensive financial support to several countries and I would like to express my profound appreciation for this, including Kuwait’s generous support to the region.

The above is adapted from a speech given in Kuwait City, Kuwait, on November 20, 2013.