5.3 Economic diversification efforts in Gulf Cooperation Council countries

Gulf Cooperation Council countries are working to diversify their economies beyond oil. They're investing in non-oil sectors, boosting private businesses, and developing human capital to reduce dependence on volatile oil revenues and create jobs for growing populations.

While these efforts have increased non-oil GDP and improved global competitiveness, challenges remain. Many countries still rely heavily on oil money for government spending, and creating enough private sector jobs for citizens has proven difficult.

Economic Diversification in Gulf Cooperation Council Countries

Drivers of Gulf economic diversification

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  Gulf Economic Monitor, February 2018 : Deepening Reforms View original

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• Vulnerability to oil price fluctuations exposes heavy dependence on oil revenues and necessitates stable, sustainable income sources
• Finite nature of oil reserves raises concerns about long-term economic sustainability and compels development of alternative industries
• Population growth and youth unemployment amplify demand for jobs outside the oil sector and require creation of employment opportunities for citizens
• Desire to enhance global competitiveness motivates efforts to attract foreign investment (FDI) and integrate into the global economy (World Trade Organization membership)

Strategies for reducing oil dependence

• Investing in non-oil sectors such as manufacturing (petrochemicals), tourism (Dubai), logistics (shipping), and financial services (Islamic banking)
• Encouraging private sector growth by providing incentives for entrepreneurs and small businesses (subsidies) and streamlining business regulations (ease of doing business reforms)
• Developing human capital through investments in education (universities) and training programs focused on skills relevant to targeted industries (vocational schools)
• Attracting foreign investment by creating free trade zones (Jebel Ali) and special economic zones, and offering tax incentives and other benefits to foreign investors (100% foreign ownership)

Successes vs limitations of diversification

• Successes:
  • Increased contribution of non-oil sectors to GDP (UAE: 70% non-oil GDP)
  • Growth in tourism (Dubai), logistics (Jebel Ali Port), and financial services industries (Abu Dhabi Global Market)
  • Improved global competitiveness (World Economic Forum rankings) and foreign investment inflows (Saudi Arabia Vision 2030)
• Limitations:
  • Ongoing reliance on oil revenues for government spending (budget deficits during oil price downturns)
  • Challenges in creating sufficient private sector jobs for citizens (high youth unemployment rates)
  • Limited success in developing knowledge-based industries (research and development)
  • Resistance to structural reforms and economic liberalization (state control of key industries)

Role of state enterprises in diversification

• State-owned enterprises (SOEs) serve as instruments for investing in strategic non-oil sectors (Saudi Aramco in petrochemicals)
  • Provide capital and support for nascent industries
  • Foster public-private partnerships and joint ventures (DP World)
• Sovereign wealth funds (SWFs) manage and invest state assets, including oil revenues
  1. Pursue long-term, diversified investment strategies (Qatar Investment Authority)
  2. Invest in global markets to generate additional income streams (Kuwait Investment Authority)
  3. Support domestic economic development through strategic investments (Mubadala Investment Company)
• Examples of prominent SOEs and SWFs:
  • Saudi Aramco (Saudi Arabia) - world's largest oil company
  • Mubadala Investment Company (UAE) - invests in aerospace, renewables, and technology
  • Qatar Investment Authority (Qatar) - manages $450 billion in assets
  • Kuwait Investment Authority (Kuwait) - oldest SWF in the world