Bahrain is leading the GCC in real productivity growth - but the bubble could burst for its neighbours, according to an international report.

Labour productivity in Bahrain increased by 5.1 per cent between 2000 and 2007 and Oman achieved 4.1 per cent, but the average across the GCC was just 1 per cent, according to research commissioned by Gulf Investment Corporation.

But if the oil and gas sector is stripped out of these statistics, Bahrain with its booming financial sector still achieved the highest level at 5.4 per cent, though the average was minus 0.2 per cent, says the report.

The growth in the labour market rather than in productivity has been responsible for almost all recent economic growth in the region, according to the study, titled Growing Beyond Oil, Productivity, Performance and Progress in the Countries of the GCC.

The improved economic performance of the GCC economies has largely been due to rapid increases in revenue from the oil and gas sector and the use of those revenues for investment in construction and real estate.

This is not a sufficient foundation for long-term economic development and presents the risk that over reliance on natural resources will hold back other sectors of the economy, according to the report, produced by The Conference Board, a global independent research organisation.

Poor growth in the region compares to a productivity surge in India of just short of 5 per cent over the same time and China has been hitting 10.5 per cent.

Growth of productivity - increasing the amount of output per unit of input - is the ultimate source of sustainable growth, but the GCC is well behind other fast-growing parts of the world, says the report.

It argues that GCC countries need to tackle a wide range of issues simultaneously to reap the benefits of higher productivity growth.

Skilled labour is a crucial input for future productivity growth and the region will have to compete for talented people against other fast growing countries, the report argues.

A shortage of skilled labour is a major bottleneck and the critical danger is that the GCC will be unable to attract a sufficient number of skilled people from outside the region or develop sufficient homegrown talent, it says.

'Doing nothing implies economic decline, stagnant living standards, and mounting social tensions,' says the report.

Future growth of the region will depend on two crucial areas, it says.

Firstly, addressing the institutional barriers to higher productivity through better functioning of product and capital markets and less restrictive government regulation, that prevents business from reallocating resources to their most productive uses.

Secondly, fixing the most critical labour market deficiencies through tackling skill mismatches among nationals, low participation especially of women, unemployment, and heavy dependence on expats, the report said.-TradeArabia News Service