Innovation holds key to economic growth

International Monetary Fund’s (IMF) recommendations to adopt policies that support research and development to promote innovation could play a pivotal role in reversing the global economic slowdown. Such recommendations could be implemented through structural reforms in labour and product markets that take innovation into account.
“Fiscal policy can play an important role in stimulating innovation through its effects on research and development (R&D), entrepreneurship, and technology transfer,” the IMF said in a report ahead of its twice-yearly meeting in Washington in April.
Hence, it urges businesses in advanced economies to invest 40 percent more in R&D on average than they do currently, which could in the long run increase the gross domestic product (GDP) of their respective countries by 5 percent, and in turn boost growth in the global economy through technology transfers.
The IMF’s push for the innovation drive aims at improving productivity amid concerns of the sagging global economic growth that is seen in slow growth in total factor productivity (TFP) since the early 2000s in advanced economies, and more recently in emerging-market economies.
While visiting the UAE, IMF Managing Director Christine Lagarde stressed the IMF’s drive for structural economic reforms, urging the GCC economies to further strengthen their fiscal frameworks and re-engineer tax systems by reducing heavy reliance on oil revenues and boosting non-hydrocarbon sources of revenues.
Speaking at a forum in Abu Dhabi, she had said, “This is particularly important for oil-exporting countries that have been heavily affected by the recent plunge in oil prices. Last year, for example, oil exporters in the MENA region lost more than USD 340 billion in oil revenues from their budgets, amounting to 20 percent of their combined GDP.”
Interacting with business circles, Lagarde suggested there was an opportunity for GCC states to design tax systems that emphasise fairness, simplicity and efficiency. This can be done by putting in place a simple system that initially focuses on VAT, ideally, a harmonised regional VAT. Even at a low single-digit rate, such a tax could raise up to 2 percent of GDP.
The Gulf Cooperation Council countries have agreed in principle to introduce VAT across the region by 2018. They have been mulling over VAT for years.
The UAE was praised by Legarde for having built large fiscal and external buffers, advancing economic diversification and taking steps to address the consequences of the sharp drop of oil prices, notably the reform of fuel subsidies.
The UAE joined IMF as a member under the federal decree No 40 for the year 1972. In October 2015, the IMF in its report highlighted that the national economy is growing at a rate twice faster than the Eurozone. The Fund stated that the UAE witnessed a steady economic growth path with the help of the financial and monetary stability led by the Ministry of Finance, and its commitment to strengthen the country’s position at the regional and world levels.
For years, the UAE has been diversifying its economy away from dependence on oil to avoid the oil price fluctuations that usually batter economies of oil exporting countries, which are now facing a new reality that is “disrupting” their traditional business models. The collapse of oil prices is causing a paradigm shift in economic landscapes.
In January, the IMF cut its growth forecast for the Middle East’s oil exporters to 3 per cent from 3.9 per cent projected in October, predicting a 2.8 per cent slip in economic growth in 2016. It is incumbent on economies to heed recommendations of the IMF that call for promotion of structural reforms within innovation perspectives. It is innovation and R&D that will buoy the economies.