How Artificial Intelligence can drive diversification in the Middle EastAmr Elsaadani, Mark Purdy and Elizabeth Hakutangwi2 PIVOTING WITH AI CONTENTSThe new factor of production.7What is artificial intelligence.9Three channels of AI-led growth.11How AI can support industrial growth and diversification.14Next steps for policy makers and business leaders.173 PIVOTING WITH AI Saudi Crown Prince Mohammed bin Salman did not mince words: “We have developed a case of oil addiction.”1 This was the princes terse summation of the central economic dilemma facing the oil-producing countries of the Middle East their dependence on the energy sector to drive growth in a 2016 interview with al-Arabiya television. In Saudi Arabia, for example, the petroleum sector accounts for roughly 43 percent of gross domestic product (GDP), according to an International Monetary Fund (IMF) report prepared for the annual meeting of the Arab Ministers of Finance in 2016, and 80 percent of its export earnings.2The kingdom is not alone. The IMF pegged oils contribution to GDP growth in the United Arab Emirates (UAE) at 34 percent. The recent steep, sustained fall in oil prices only makes the situation more precarious.Figure 1: Saudi Arabia economic fortunes closely mirror the oil cycleThe energy sector will be no more successful at meeting the other critical challenge facing these countries: high rates of unemployment and underemployment, particularly among the regions youth. A 2017 World Economic Forum study on the future of jobs and skills in the Middle East and North Africa projects that the regions population, already among the worlds youngest, will grow by a quarter by 2030, a significant proportion of which will be of “prime working age.” Youth unemployment today stands at 31 percent, cautions the study.3Source: Accenture analysis based on Saudi Arabian Monetary Authority (SAMA)724450500550600650700750Mar2014Jun2013MarReserves WTI SpotPrice2013Jun2014Sep2013Dec2013Sep2015Dec2014Sep2014Dec2015Mar2015Jun2015Mar2017Jun2016Mar2016Jun2017Sep2017Dec2017Sep2016Dec20160102030405060708090100110120663682695554717725733736664647609579570536509502485496691WTI Spot Price ($ Per Barrel) Reserves (US$ Billion)4 PIVOTING WITH AI The way out of this bind: diversifying the economy. To achieve this goal, how much should oil ultimately contribute to GDP? Using a regression equation and GDP time series data from 1980, Accenture Research calculated optimal real GDP, divided between oil and non-oil sectors, to 2030. This modelling reveals that for the kingdom to achieve faster growth and to reduce the strain on public finances, oils contribution to GDP must continue to drop to around 30 percent by 2030. The model further suggests that to do this, the oil industry will need to grow at a compound annual growth rate (CAGR) of just under two percent, while non-oil related industries need to grow at more than twice that rate, a CAGR of 5.8 percent for a combined GDP (oil plus non-oil) CAGR of 4.3 percent to 2030.If diversification does not take place at the anticipated rate, and oil prices remain low, the kingdoms economy will grow at a CAGR of 2.6 percent to 2030, thus missing its ambitious Vision 2030 national development plan targets.Saudi Arabia: the 4.3 percent solution Since the 1990s, the contribution of the energy sector to the Saudi economy has fallen significantly, from almost two thirds of GDP to 43 percent by 2015. But despite recent success in reducing oil dependence, Saudi Arabias economic and financial fortunes remain strongly tied to international energy marketsboth GDP growth and reserves still closely mirror oil price movements. The step-by-step deterioration of the kingdoms position is charted in Figure 1 beginning in mid-2014 with the slump in oil prices, which created both current account and fiscal deficits. This forced the Saudi Arabian Monetary Authority, hobbled by the countrys fixed exchange rate regime, to draw on the countrys reserves and to issue debt to finance the dual shortfall. Meanwhile, annual real GDP growth has fallen from 10 percent in 2010 to a forecast 2.7 percent this year. Real GDP Growth (year-on-year) GDP Composition (oil and non-oil)-4%0%4%8%12%1023451980 1990200020102020 20302012Saudi Arabia UAE2010 20143.82.82.0 70%57%30%-0.71.74.13.72.75.410.05.02016 2018f 2020fNon oilRiyal, TrillionsOilSource: Accenture Research based on SAMA and Oxford Economics5 PIVOTING WITH AI Many of the regions governments have responded with a number of interconnected strategies chiefly, economic diversification aimed at developing non-oil sectors to provide sustainable growth and employment and reduce reliance on the public sector for jobs; significant upgrades in education and training to prepare the next generation for the jobs of the future; and the streamlining and modernization of regulation and governance. What all these strategies have in common is an ambitious and comprehensive commitment to artificial intelligence (AI). This emphasis on AI is well founded. According to Accenture analysis, AI has the potential to significantly raise economic growth rates in the region, adding $215 billion and $182 billion in annual gross value add (GVA) to the economies of Saudi Arabia and UAE, respectively, by 2035. Moreover, our analysis shows that AI can help address a wide range of economic and social challenges facing the region, ranging from volatility of oil prices, to rapid urbanization, and to water scarcity and food security (See infographic on “The Super Seven: seizing the social dividend of AI”, page 21-24).Recognizing the potential of AI, many countries within the region are already becoming early adopters of the technology and laying the foundations for a global leader position in the future. The UAE is a case in point. According to our recent technology vision survey, half of executives are already planning investments in AI over the next year, second only to the internet of things (See Figure 2).4In 2017, the Emirates launched the UAE Strategy for Artificial Intelligence, a major initiative within the countrys Centennial 2071 objectives. Among its aims to boost government performance at all levels; it will also encompass nine other sectors, including transport, health, education, environment and renewable energy. Sheikh Mohammad bin Rashid Al Maktoum, UAE vice president and prime minister, called AI “the new wave upon which all our services, sectors and future infrastructure will rely on.” And to drive the point home, the Emirates named a cabinet-level Minister of Artificial Intelligence, the worlds first. Saudi Arabia has taken equally bold steps toward the post-oil future. At the heart of the kingdoms Vision 2030 national development plan (which is financed by the worlds largest sovereign wealth fund) is the technology sector, which is the engine of its diversification strategy. And technology in government, business, services, industry, healthcare, education is increasingly enabled by AI. The clearest sign of this commitment, at least on paper, is NEOM a planned $500 billion, 26,500 square-kilometer “megacity”: part technology and R it would take three humans six months to complete the same task.6Unlike conventional capital such as buildings and machinery, AI in its physical forms robots, for example, and intelligent machines can also improve over time, thanks to its self-learning capabilities. Figure 3: The AI growth modelOur model adapts the traditional growth model by including AI as a factor of production+Capital Labor+ + +Capital LaborIndicates the Change in that factor.TFPAITFPTraditional GrowthModelAdapted GrowthModelSource: Accenture AnalysisFigure 4: Growth scenarios for Saudi Arabia and United Arab EmiratesAI as a new factor of production can lead to significant growth opportunities for these economiesSource: Accenture and Frontier EconomicsBaseline AI additional3.23.2 1.11.1BaselineAI steadystateSaudi Arabias GVA in 2035 (US$ billion)IntelligentAutomationAugmentation TFPBaselineAI steadystate1248124843 129 43Total GVA AI steady state:US$1,462 billion + US$215 billionGrowth rate of GVA in 2035 (%) Baseline AI additionalIntelligentAutomationAugmentationUnited Arab Emirates GVA in 2035 (US$ billion) Growth rate of GVA in 2035 (%) 2.72.7 1.6BaselineAI steadystateBaselineAI steadystate65565556 100 26Total GVA AI steady state:US$838 billion + US$182 billion8 PIVOTING WITH AI To better understand the effect of AI as a new factor of production in the Middle East, Accenture, in association with Frontier Economics, modeled AIs potential for the economies of Saudi Arabia and the UAE, in terms of both the rate of growth and the gross value added (GVA is a close approximation of GDP). Because it takes time for the effect of a new technology to be absorbed into the economy, we used 2035 as the year of comparison (see “Appendix: Modeling the GVA impact of AI”). The two sets of graphs below (Figure 4) show growth scenarios for each country, in terms of both the rate of growth and GVA. For each country, the pair of graphs on the left shows AIs impact on total GVA; the pair on the right, the impact on the growth rate. The two growth scenarios depicted for each country are a “baseline” (business as usual) scenario, that is, with no AI effect, and an “AI steady state” scenario illustrating the potential effect of adding AI as a new factor of production. AIs impact is transformative: It can add up to 1.1 percentage points to Saudi Arabias economic growth rate and as much as 1.6 percentage points to the rate of growth in the UAE. The potential GVA of that AI-augmented growth is equally significant: $215 billion for Saudi Arabia, $182 billion for the Emirates.9 PIVOTING WITH AI WHAT IS ARTIFICIAL INTELLIGENCE?AI is not a new field; much of its theoretical and technological underpinning was developed over the past 70 years by computer scientists such as Alan Turing, Marvin Minsky and John McCarthy. Today, the term refers to multiple technologies that can be combined in different ways to:SENSE COMPREHEND ACTComputer vision and audio processing, for example, are able to actively perceive the world around them by acquiring and processing images, sound and speech. The use of facial recognition at border control kiosks is one practical example of how it can improve productivity.Natural language processing and inference engines can enable AI systems to analyze and understand the information collected. This technology is used to power the language translation feature of search engine results.An AI system can take action through technologies such as expert systems and inference engines, or undertake actions in the physical world. Auto-pilot features and assisted-braking capabilities in cars are examples of this.All three capabilities are underpinned by the ability to learn from experience and adapt over time. AI already exists to some degree in many industries but the extent to which it is becoming part of our daily lives is set to grow fasto key factors are enabling AI growth:1. Unlimited access to computing powerPublic cloud computing was estimated to reach almost US$70 billion in 2015 worldwide. Data storage has also become abundant.2. Growth in big dataGlobal data has seen a compound annual growth rate (CAGR) of more than 50 percent since 2010 as more of the devices around us have become connected.As Barry Smyth, professor of computer science at University College Dublin, told us: “Data is to AI what food is to humans.” So in a more digital world, the exponential growth of data is constantly feeding AI improvements.Source: Accenture analysisSENSECOMPREHENDACTAudio ProcessingComputer Vision AI TECHNOLOGIES ILLUSTRATIVE SOLUTIONSVirtualAgentsIdentityAnalyticsCognitiveRoboticsSpeechAnalyticsDataVisualizationNatural Language ProcessingKnowledge RepresentationMachine LearningExpert SystemsRecom-mendationSystems10 PIVOTING WITH AI