Chart 27: The launch of government industrial policies in the 1980s helped Malaysia diversify 35: === Manufacturing value-added (% of GDP) 100 30 <= Manufactured exports (% of merchandise exports, rhs) 80 25 20 60 15 40 10 20 5 0 0 fan) (oe) [<o} cop) N LO foo} —_ + YY fan] (se) [<e} cop) N lO co _— + co ico} co co aed y~ y~ fee) co co [op] [op] D> lop) aS Sa So = =- fo>) fo>) [o>) fo>) Lop) [op] fop) [o>) oO fo>) [o>] [op] [op) lop) Oo So o Oo Oo a CC oo Source: Haver, BofA Merrill Lynch Global Research Norway case study suggests institutions are paramount While it is perilous to extend lessons that could overemphasize idiosyncracies, the case of Norway highlights, if anything, the importance of sound institutions and macro management when it comes to broader economic diversification. The case of Norway has relevance for the Gulf Cooperation Council countries (GCC), including Saudi Arabia, especially since oil discovery (late 1960s) and oil production (1970s) timelines were not that sensibly different from the GCC. That being said, outcomes were widely different as well as the starting point since Norway was already a developed country with mature social, economic and political institutions at the time of the discovery of oil. This allowed a distinction between the management and ownership of natural resources uncommon in the GCC and several other resource-based economies, in our view. Four ways in which the supply-side matters for economic diversification We believe that there are four lessons to learn from Norway’s outperformance: 1) The importance of human capital Norway’s priorities from early on were to build human capacity, investing in education, increasing labor force participation and supporting productivity growth. 2) Prudent conduct of fiscal policy Current Norwegian oil revenue management puts considerable emphasis on stabilizing the economy and facilitating a gradual phase-in of oil revenues over time (which crowds out trophy projects and put onus on a