Introduction
Over the past 50 years, Arab Gulf states have appreciated the wealth generated by the production and export of oil and natural gas. The rise of international oil prices, which reached more than US$100 per barrel between 2009 and 2014, is the main contributor of this wealth. By October 2016, the Gulf Cooperation Council (GCC ) countries —Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE—have accumulated assets and capital worth over US$2.99 trillion, mostly managed by their sovereign wealth funds (SWFs ) in the global markets. Substantial investments have also been made in infrastructure, education, healthcare, roads, ports, power stations and water desalination. Socio-economic conditions and social welfare have improved substantially, with gross domestic product (GDP ) per capita of Qatar and UAE exceeding US$100,000 and US$66,000 per annum, respectively, making them among the highest per capita income rate countries in the world. Unfortunately, the generation of such wealth is not sustainable due to frequent changes in international oil prices. Changes in oil prices can go either way in terms of capital surplus and capital accumulation. For example, in 2010, high oil prices helped GCC countries to have a combined fiscal surplus of some US$600 billion. However, the sharp decline in oil prices by almost 70 per cent, from more than US$100 per barrel in January 2014 to less than US$30 per barrel in January 2016, has raised serious concerns about the financial sustainability of the Gulf countries. International Monetary Fund (IMF ) warned that sustained low oil prices would lead to an accumulated combined fiscal deficit of US$700 billion by 2020. This forecast is a strong warning to GCC countries of their need to build vibrant, diversified economies that can withstand the effects of oil price shocks.
An assessment of the current national vision s and development strategies in GCC countries indicates that little has been achieved in economic diversification because local economic cycles remained dependent on oil and gas revenues. The fragility of the national economic cycle is evident in the negative impact of oil price fluctuations on export revenues and government income, as well as the import of goods, services and workers to meet domestic needs. Such impact affects growth levels in gross domestic product (GDP) negatively. To eliminate such effects, there is a need to transform Gulf economies from a traditional allocation state mode l that is dependent on the government to a modern economic growth model that is led by the private sector . Strategic transformation often entails radical changes in the style of management and addresses private sector challenges that hinder the development process .
In fact, effective transformation can help GCC countries to mobilise efficiently their national resources in long-term sustainable development. GCC countries have long realised the infinite nature of oil and gas, but the options to diversify their economies are limited. The first phase of diversification began in the 1970s by expanding the oil sector in the upstream and downstream industries, as well as the creation of oil-related industries such as petrochemicals and aluminium. It shifted substantial proportions of investment from the extractive industries to capital-intensive and energy-intensive industries such as petrochemicals, fertilisers, steel and aluminium that utilise their comparative advantage in the energy sector, as well as expanding in industries that could benefit from low-cost energy such as cement, construction and building materials. Despite having comparative advantages in these industries globally, this phase has not changed the structure of the Gulf economies. As percentage of GDP and revenues of export and government in GCC countries, oil contributed to 39.7 per cent of GDP, 78.2 per cent in export revenues and 83 per cent in government revenues in 2011. This shows that sustained growth in oil revenues, which coincides with overall economic growth and high living standards, is no longer guaranteed because of frequent disturbances in the global energy market and fluctuations in international oil prices .
More recently, a new phase of diversification has taken the form of investment in physical and human capital development, particularly in areas relating to infrastructure, schooling and health services. Diversification has gone beyond the energy sector and its related industries, with the intention of working towards the creation of knowledge-based economy. Economic visions and national development strategies are currently concentrating on export diversification and development of service industries , including finance, tourism, aviation, media, education, healthcare housing and real estates. National visions focus on key pillars such as human development, social development, economic development and environmental development—all of them contribute to sustainable development. Of course, there are numerous challenges to create knowledge economy in GCC countries, given the current condition of their education system s, low investment in research and development (R&D) that is less than 1 per cent of their GDP compared to global average of 3 per cent, and restricted civil liberty and political freedom that hinder private sector development. However, given the availability of capital and scarcity of non-energy resources, the move towards the creation of knowledge-based economy is probably the most sensible policy option for GCC countries to help create a viable economy that sustains the livelihood of society in the aftermath of the oil era.
This chapter aims to shed some light on the diversification strategies in the GCC countries. It begins first by exploring the definitions and key drivers of diversification. The next section explains why GCC needs to diversify their economies. The third section critically examines economic diversification strategies and policies as spelled out in the national visions and national development strategies. The fourth section explores various aspects supporting the private sector and increasing its role in economic diversification. Analysis underscores the aptitude of the private sector to manipulate the political settings by support reform programmes when they suit it and opposing reforms when they do not secure preferential treatment and concessions, as is the case of Kuwait. It stresses the capacity of the private sector to participate effectively with the public sector in major infrastructure projects through various schemes including public-private partnerships (PPPs ) . In some cases, private enterprises have taken advantage of the incentives provided by GCC common market to expand their activities in non-oil sectors in the regional market.
Definitions of Economic Diversification
Economic diversification implies the development of policies that reduce the dependence on a single industry or sector such as oil in terms of its contribution to GDP, export earnings and government revenues . Decreasing dependence on oil occurs by developing non-hydrocarbon economic sectors such as services, manufacturing, tourism and agriculture in order to become new sources of government revenues. Diversification is a complex and lengthy process that requires serious structural changes in the economy. It may occur within the same sector such as energy by shifting resources and investment from the upstream to downstream industries in oil and gas or providing new opportunities for new non-fossil fuel products such as renewable or alternative energy. Diversification also occurs by opening up new non-hydrocarbon economic sectors for development such as services, finance, tourism and media or by shifting investment from one sector to another, often from the primary to the secondary and tertiary sectors to increase the value-added of national products. Hvidt (2013) argues that diversification entails a broad societal process, which transfers a country from a single source of income (oil and gas) to a society where multiple sources of income are generated across the primary, secondary and tertiary, and where large sections of population, including public and private enterprise s, participate in the development process .
The motivation of diversification is to reduce or minimise economic and financial risks that are often associated with demand and price fluctuation. In such unstable and unpredictable markets as energy, diversification strategies provide comfort and practical solutions to compensate for the decline in international oil prices and hence their reduced oil export revenues . Although the risk factor is probably the most compelling force of diversification in the GCC countries, there are other reasons why these countries should diversify their economies. El Kharouf et al. (2010) spelled out some of these factors, which include low rate of sustainable economic growth, lack of public and private incentives to accumulate human capital, lack of competitiveness in the leading sectors, the likelihood of economic shocks, and sharp decline in commodity prices and their negative spillover effects in the economy. The latter factor has made it imperative for the GCC countries to consider accelerating diversification after the fall in oil prices in 2014.
In the GCC context, successful economic diversification depends on the ability of the state to implement wide-ranging structural change that addresses the imbalance between the public sector and the private sector in the development process . Hvidt (2013) argues that policies aiming at achieving diversification tend to favour greater participation of the private sector in economic development. This is not the case in GCC, where oil and gas are capital-intensive state-run industries. Hence, diversification in the energy sector sustains the leading role of the public sector in development, as long as major industries such as petrochemicals, aluminium and steel are oil-based, energy-intensive and heavily subsidised by the state. Investment in these oil-related industries is unlikely to reduce the dependence of the state on the hyd...