Countries of the Gulf Cooperation Council (GCC) will have to adjust the incentives of workers and firms to encourage them to work and produce in the non-oil tradable sector if these economies are to succeed in diversifying their economies, according to IMF study.

With oil prices declining by 40% since June, the importance of diversification is once again highlighted, it said.

While governments in the region have made some progress toward economic diversification in recent years, much remains to be done. The strategies pursued thus far have yielded mixed results, according to the report.

To make significant progress toward reducing their reliance on oil, GCC governments need to change the incentive structure of the economy to encourage individuals to work in the private sector and induce firms to look beyond domestic markets for new export opportunities, the authors say.

The GCC growth model which relies on oil as the main source of export and fiscal revenues has delivered strong economic and social outcomes. Over the years, GCC governments have increased public sector employment and spending on infrastructure, health, and education. This has helped raise standards of living and support private sector activity, particularly in such sectors as construction, trade and retail, transport, and restaurants.

But the current growth model has weakness, the report points out. Greater diversification would reduce exposure to volatility in the global oil market, help create private sector jobs, and establish the non-oil economy that will be needed in the future when the oil revenues dry up.