Introduction to Economic Diversification in the GCC Region

Abstract

This chapter provides an analytical review of the current economic diversification strategies of the Gulf Cooperation Council (GCC) countries. It argues that diversification has been successful in the energy sector through investment in upstream and downstream industries, as well as energy-intensive industries such as petrochemical, aluminium and fertilisers, where GCC has comparative advantage. However, these countries have yet to expand in non-hydrocarbon industries to build vibrant, diversified economies that can withstand the effects of oil price shocks. Analysis of the six national diversification strategies reveals that those with less proven oil and gas reserves are more enthusiastic than others in diversifying their economies. The continuity of the allocation state model and dominance of the public sector are major challenges of diversification, and if GCC countries are to implement successful diversification, they must support and increase the role of private sector in economic development.

Full text

1© Gulf Research Centre Cambridge 2018
A. Mishrif, Y. Al Balushi (eds.), Economic Diversication in the Gulf
Region, Volume I, The Political Economy of the Middle East,
https://doi.org/10.1007/978-981-10-5783-0_1
CHAPTER 1
Introduction to Economic Diversication
in the GCC Region
AsharfMishrif
IntroductIon
Over the past 50 years, Arab Gulf states have appreciated the wealth gen-
erated 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 accumu-
lated 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.
A. Mishrif (*)
King’s College London, London, UK

2
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 com-
bined scal 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 nancial sustainability of the Gulf countries.
International Monetary Fund (IMF) warned that sustained low oil prices
would lead to an accumulated combined scal decit of US$700billion
by 2020. This forecast is a strong warning to GCC countries of their
need to build vibrant, diversied economies that can withstand the effects
of oil price shocks.
An assessment of the current national visions and development strate-
gies in GCC countries indicates that little has been achieved in economic
diversication 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 uctuations on export revenues and gov-
ernment 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 model 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 chal-
lenges that hinder the development process.
In fact, effective transformation can help GCC countries to mobilise
efciently their national resources in long-term sustainable development.
GCC countries have long realised the innite nature of oil and gas, but the
options to diversify their economies are limited. The rst phase of diversi-
cation 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 benet from low-cost energy
such as cement, construction and building materials. Despite having com-
parative advantages in these industries globally, this phase has not changed
A. MISHRIF

3
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 govern-
ment 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 uctuations in international oil prices.
More recently, a new phase of diversication has taken the form of
investment in physical and human capital development, particularly in
areas relating to infrastructure, schooling and health ser vices. Diversication
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 con-
centrating on export diversication and development of service industries,
including nance, tourism, aviation, media, education, healthcare housing
and real estates. National visions focus on key pillars such as human devel-
opment, 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 systems,
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 diversication strategies in
the GCC countries. It begins rst by exploring the denitions and key
drivers of diversication. The next section explains why GCC needs to
diversify their economies. The third section critically examines economic
diversication 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
diversication. 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
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

4
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 diversication 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. Diversication
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. Diversication also
occurs by opening up new non-hydrocarbon economic sectors for devel-
opment such as services, nance, tourism and media or by shifting invest-
ment 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 diversication 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 enterprises, participate in the development process.
The motivation of diversication is to reduce or minimise economic
and nancial risks that are often associated with demand and price uctua-
tion. In such unstable and unpredictable markets as energy, diversication
strategies provide comfort and practical solutions to compensate for the
decline in international oil prices and hence their reduced oil export rev-
enues. Although the risk factor is probably the most compelling force of
diversication 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
A. MISHRIF

5
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 diversication after the fall in oil
prices in 2014.
In the GCC context, successful economic diversication 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 diversication 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, diversication in
the energy sector sustains the leading role of the public sector in develop-
ment, 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 depen-
dence of the state on the hydrocarbon sector because their production
depends largely on the availability of low-cost energy. Similarly, invest-
ments in renewable energy may provide a new opportunity for diversica-
tion from fossil fuel to non-fossil fuel energy, but shifting capital from
fossil to non-fossil fuel is unlikely to reduce the role of the public sector in
the economy because renewable energy is capital-intensive and run by
large state-owned enterprises (SOEs). This concludes that diversication
in energy cannot reduce the role of the public sector in the economy nor
the dependence of the state on the hydrocarbon sector.
Thus, diversication should take place in non-hydrocarbon sectors that
are largely underdeveloped. Beblawi (2011) identies import substitution
industries for diversication because this type of industries provide a
diverse set of activities, most commonly manufacturing of building materi-
als and food processing. He argues that these industries often attract
small- and medium-sized enterprises (SMEs) that are labour-intensive and
contribute to development outside the energy sector. The development of
import substitution industries could offer the private sector greater oppor-
tunities for investment in manufacturing, tourism, nance, banking, insur-
ance, nancial services, construction and real estates. These industries do
not only facilitate the expansion and growth of the private sector, but they
also enable the government to spread the risk of possible economic shocks
and uctuation in oil prices, while creating a variety of income revenues.
Morakabati etal. (2014) stress the importance of export diversica-
tion and underline the association between the diversication of exports
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

6
and economic development. Their analysis raises the question of whether
export diversication is a natural outcome of the growth process or
whether the growth process leads to diversication. They argue that
export diversication is a growing trend in most developing countries;
80 per cent of these countries were exporting primary goods some 50
years ago, while now 80 per cent of them export manufactured goods.
They highlight the tendency among these countries towards developing
capabilities in the export of services, particularly after the introduction
and implementation of General Agreement on Trade in Services in 1995.
Apparently, dependence on a narrow range of exports makes the country
susceptible to the negative effects of price shocks, which, in turn, desta-
bilise the economy and discourage investment by the private sector
(Shuai 2013; Ghosh and Ostry 1994). For Cypher and Dietz (2009)
economic development is not just about growth in GDP, but it is about
developing skilled labour workforce, creating knowledge and techno-
logical advancements, enhancing well-being of citizens and improving
the quality of their life. In most GCC countries, tourism is an activity
that can increase foreign direct investment (FDI), increase GDP and
reduce the level of dependence on a narrow primary product range of
goods.
Key drIvers ofeconomIc dIversIfIcatIon InGcc
countrIes
In the GCC region, one can identify three key drivers of diversication.
The rst and foremost driver is the public sector. Hertog (2012) argues
that unlike most Middle East and North Africa (MENA) countries, GCC
countries have managed to create a new breed of dynamic, protable and
rapidly growing state-owned enterprises that are successful in manufactur-
ing and services sectors and stand in contrast to the politicised and inef-
cient SOEs in other oil-producing countries such as Venezuela, Iran and
Russia. The success of the SOEs in the Gulf countries does not necessarily
mean that these countries should not develop their private sector enter-
prises. SOEs have the capacity to focus on major operations in the produc-
tion process, while leaving enormous supporting services to be provided
by private enterprises, particularly SMEs. Chapter 3 provides a clear exam-
ple of the capacity of an Omani public telecom company that successfully
facilitated the participation of many SMEs in the operation of the network
through outsourcing and subcontracting.
A. MISHRIF

7
The second driver of diversication is the private sector. This sector is
in a much weaker position than the public sector when it comes to
economic activities, because of the nature of the current allocation state
model, in which a relatively small part of the population is involved in
economic activities. The preference of most citizens to work for the gov-
ernment and the public sector undermined the base of skilful and qualied
workforce; hence, most private enterprises depend on expatriates, who
come to the Gulf countries on temporary basis. The private sector has the
potential to become the driving force of diversication, largely because the
oil sector does not provide many jobs, while the public sector is excessively
overcrowded and can no longer absorb many new entrants. Although the
allocation states do not need to focus on creating productive base and
therefore cause systemic underdevelopment of the productive sectors,
there is an emerging trend across the Gulf region to develop private sector
enterprises as vehicles for employment and engines of growth. GCC coun-
tries are also looking upon FDI as means of employment and transfer of
the much-needed technology, knowledge, capital and management attri-
butes; all of them are required to support GCC countries in creating
knowledge-based economy.
The third driving force of diversication is sovereign wealth funds
(SWFs). Mishrif and Akkas (2016) attribute the importance of SWFs to
their investment in key economic sectors such as infrastructure, nance,
banking, Islamic nance, technology, transportation, telecommunications,
education, construction and real estates. These nancial tools have invested
considerably in major infrastructure projects at their home countries,
while having the capacity to make inter-GCC and international capital
mobility in order to diversify their economies at the national, regional and
global levels. Data shows that investments by the GCC SWFs in real estates
increased substantially from US$1.1billion in 2005 to US$12billion in
2014, with two peaks of US$9.3billion and US$9.6billion in 2008 and
2013, respectively. The decline in oil prices in late 2014 affected the real
estate sector, which experienced signicant reduction in SWFs’ invest-
ments by almost half to US$6.6billion in 2015. GCC SWFs have also
made huge investments in infrastructure, with US$14.6 billion,
US$5.5billion and US$3.5billion made in 2009, 2014 and 2015, respec-
tively. They invested US$17.7billion in the industrial sector in 2009. The
nancial sector attracted most funds, with US$9.2billion, US$20.2bil-
lion, US$2.9billion, US$16billion and US$5.8billion invested, respec-
tively, in 2007, 2008, 2009, 2010 and 2011. SWFs have also invested
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

8
huge funds, though to lesser degrees, in energy, healthcare and informa-
tion technology. Table1.1 shows a great potential of further investments
by GCC SWFs, which possessed just under US$3trillion, accounting for
40 per cent of total global SWFs in June 2016.
Why dIversIfIcatIon matters?
In the current economic conditions, diversication has become a necessity,
not a policy option in the GCC countries. The economic structure is
unsustainable, and all GCC countries have suffered from the negative
effects of the uctuation in international oil prices and increasingly declin-
ing demand on fossil fuel from oil and gas in light of technological
advancement in renewable energy and growing concerns over the environ-
ment, more specically climate change. Date shows that GCC countries
share specic structural economic features. They depend heavily on the
hydrocarbon sector, which accounted for high government revenues at 83
per cent and approximately 78.2 per cent of total GCC exports in 2011.
This type of structural weakness in Gulf economies poses a serious threat
Table 1.1 Sovereign wealth funds of the GCC countries (US$ billion), June
2016
Country Holding funds Total funds
UAE Abu Dhabi Investment Authority US$792 bn US$1246.8 bn
Investment Corporation of Dubai US$196 bn
Abu Dhabi Investment Council US$110 bn
Mubadala Development Company US$66.3 bn
Int. Petroleum Investment Company US$66.3 bn
Emirates Investment Authority US$15 bn
Ras Al-Khaimah Investment Authority US$1.2 bn
Saudi Arabia SAMA Foreign Holdings US$598.4 bn US$758.4 bn
Public Investment Fund US$160 bn
Kuwait Kuwait Investment Authority US$592 bn US$592 bn
Qatar Qatar Investment Authority US$335 bn US$335 bn
Oman State General Reserve Fund US$34 bn US$40 bn
Oman Investment Fund US$6 bn
Bahrain Mumtalakat Holding Company US$10.6 bn US$10.6 bn
Total funds US$2984.8 bn
Sources: SWFs Institute, October 2016
A. MISHRIF

9
to medium- and long-term sustainable development in the wake of the
depleted nature of their oil and gas and uctuation in oil prices. Since
2014, almost all GCC countries have had to rely on their foreign exchange
reserves and impose signicant cuts in their public expenditures to address
budget decits. The modest recovery in the oil prices from less than
US$30 per barrel in January 2016 to around US$50 per barrel in October
of 2016 falls short of lling budgetary gaps in GCC countries. According
to the IMF’s Middle East Regional Director, oil was expected to stabilise
at around US$60 per barrel in the medium term, a rate lower than the
budgetary breakeven point for Saudi Arabia, Qatar and the United Arab
Emirates at US$79.7, US$62.1 and US$58.6, respectively (Ahmed 2016).
The level drops to US$47.8 per barrel in the case of Kuwait, but it shoots
up to US$77.5 and US$93.8in the case of Oman and Bahrain, respec-
tively. In order for the GCC countries to balance their budgets, they had
to cut back their pending in the next ve years and nd ways to raising
non-oil revenues.
The impact of budgetary gaps has had negative effects on the overall
growth in the GCC region as a whole, with regional GCC expected to be
at just under 2 per cent in 2016. The Saudi GDP has declined from 3.5
per cent in 2015 to 1.2 per cent in 2016, while the economies of UAE,
Kuwait and Qatar have expanded by around 2.3 per cent, 2.5 per cent and
2.6 per cent, respectively. The rapid economic growth fuelled by high oil
prices in the past ten years has ended. In September 2016, Saudi Arabia
introduced drastic austerity measures, cutting salaries of cabinet ministers
by 20 per cent, slashing benets for the 160 members of the consultative
council and limiting overtime pay and allowances for civil servants. The
fall in oil revenues forced some GCC governments to cut energy subsidies
and shelve many of their infrastructure projects. Further measures to bal-
ance their budgets and diversify revenues are evident in the commitment
of GCC government to levy a value-added tax of around 5 per cent in
2018. More socially sensitive measures such as reviewing and cutting pub-
lic sector wage bills, where GCC countries spend twice as much as public
wage bills than other emerging markets, could be seen as a way to encour-
age Gulf citizens to seek employment in the private sector that is currently
run by expatriates (Kerr 2016).
Indeed, the urgency to diversify Gulf economies does not arise just
from the above scal and nancial factors. GCC countries are increasingly
facing huge political, economic, demographic, social and environmental
challenges, which affect directly and indirectly their sustainable economic
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

10
development. Economically, non-hydrocarbon sectors remain weak and
continue to be dependent on oil revenues and, in turn, on the price of oil.
For example, private enterprises are heavily dependent on the public sector
and government expenditures. This is evident in the reliance of industries
such as manufacturing, petrochemicals, water desalination and aviation on
low energy costs and effective government subsidies to maintain global
competitiveness. The banking and nancial services are dependent on the
ow of money determined by oil revenues. Any change in oil-enabled
government spending policies will have huge impacts on all sectors of the
GCC economies. The association between these economies and govern-
ment development expenditures and international oil prices has become
clear with the current drop in oil prices that led GCC countries to take
exceptional measures by either drawing on foreign reserves or issuing pub-
lic bonds to close budget decits.
Politically, the changes in the energy markets may create frequent
shocks to the GCC countries, as these countries still rely on oil revenues
to secure their own political legitimacy. The effects of energy market
uctuations are likely to be painful on the more populous and less
wealthy countries such as Bahrain, Oman and Saudi Arabia, which are
less prepared than Qatar, UAE and Kuwait, in weathering the negative
effects of declining oil revenues. Since 2011, the former three countries
have faced difculties in dealing with popular uprisings and disturbances
and responded by balancing reduced budgets with the need to bolster
their political legitimacy through economic largesse for their popula-
tion. For example, in 2011, Saudi government provided one of its larg-
est subsidy programmes, with US$136billion to support housing and
employment, particularly for young generation. With this unfound and
unexpected uncertainty over political legitimacy, the need for new
modes of economic development based on increased productivity and
an end to long-standing rentierism becomes more pressing. Malik
(2015) goes further to argue that economic diversication carries deep
power implications for ruing elites. He thinks that good economic poli-
cies rarely constitute good politics, because structural changes demanded
by economic diversication promise to empower business constituencies
that could potentially challenge the ruling elite, particularly in a rela-
tively liberal system such as Kuwait and UAE.He believes that for diver-
sication to succeed, its political costs for ruling elites must be offset
and resource-dependent elites must be compensated for the losses they
will risk.
A. MISHRIF

11
Environmentally, there is a growing international environmental con-
sciousness, which is driving demand for machinery with increased ef-
ciency, leading to the subsequent drop in demand for energy as well as
increased potential of renewable energy sources. This comes amid con-
cerns about climate change, hence calling for a reduction in carbon emis-
sions from fossil fuel and the signing of the Paris Agreement in December
2015. In contrast to the economising of fossil fuel use in the developed
countries, domestic energy use in the GCC countries continue to grow.
Indeed, this massive reduction in oil revenues, together with the declining
overall demand for fossil fuels owned to advanced technology in renew-
able energies and rise in the production of non-conventional fossil fuels
such as shale gas, which is currently produced in large quantities in the
US, Canada and China, has already placed huge strains on Gulf
economies.
Gcc dIversIfIcatIon strateGIes andPolIcIes
The Gulf countries have underlined their awareness of the depleted nature
of oil and gas in economic planning. National visions and development
plans have stressed the need for economic diversication since the mid-
1990s. These visions and plans highlight the aims and aspirations of the
GCC governments in relation to economic and social development. Four
key elements have broadly featured in the national visions: human, social,
economic and environmental development. They focus on broader con-
cepts such as sustainable development and inclusive growth, which are
difcult to attain and measure given the nature, size and structure of Gulf
economies. However, economic diversication has been a permanent fea-
ture in all Gulf national visions and economic plans. Some of these visions
such as the Bahraini Vision 2030 have looked upon the private sector as a
driving force for economic development, while others such as the UAE
Vision 2021 stressed the important role played by the public sector in the
development process.
Oman Diversication Strategy
Oman Vision 2020 that was designed and announced in 1995 and cov-
ered the period 1996–2020 underscores the limited oil and gas reserves
and therefore unreliability as main sources of income in the long run.
Omani diversication strategy aimed at achieving structural changes in the
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

12
economy by diversifying the production base, increasing the role of the
private sector in the economy and developing human resources capabili-
ties. This means that the country has had to embark on the liberalisation
and expansion of non-oil sectors and enable new industries to grow and
lead in the development process. The strategy aimed to expand key indus-
tries such as services, tourism, mining, agriculture and sheries in order to
reduce the share of the oil sector to only 9 per cent of GDP by 2020.
Details of how this could be achieved are spelled out in three ve- year
economic plans: the Seventh Five-Year Plan (1996–2011), the Eighth
Five-Year Plan (2011–2016) and the Ninth Five-Year Plan (2017–2021).
Both the vision and three plans have focused on three main areas for
development. The rst area is the development of infrastructure by invest-
ing more than half of the Eighth Five-Year Plan in the construction of
airports and roads and another 26 per cent in seaports, water and housing.
The second area is supporting private sector development, particularly
SMEs. It is believed that the private sector is more capable of attracting
international investment and generating jobs, as well as enhancing the
quality and competitiveness of the Omani workforce. The third area is the
improvement in the economic environment. Oman has introduced exten-
sive economic reform programmes, most notably the liberalisation of
investment environment including investment and competition laws.
Despite its pioneering position and ranking as the second most diversied
economy among GCC countries, Oman is heavily dependent on the
hydrocarbon sector as oil accounted for 41 per cent of GDP, 77 per cent
of government income and 65 per cent of export revenues in 2011, as
shown in Table1.2. The Vision 2040 that is currently being developed by
the Supreme Council of Development may have concerted plans to over-
come the challenges of economic diversication.
Table 1.2 Oil as percentage of export and government revenues and GDP, 2011
Country % of export revenues % of government revenues % of GDP
Bahrain 69 86 24
Kuwait 90 93 45
Oman 65 77 41
Qatar 91 80 46
Saudi Arabia 85 85 50
UAE 69 77 32
Sources: Martin Hvidt 2013
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13
Bahrain Diversication Strategy
Bahrain is in a similar position as Oman when it comes to dependence on
oil in economic development. As Table1.2 shows, oil accounted for 86
per cent of government income, 69 per cent of export revenues and only
24 per cent of Bahrain’s GDP in 2011. The country introduced its Vision
2030 in 2008, which followed by a more detailed National Economic
Strategy in the following year. The vision aimed to shift the economy from
dependence on oil to creating “a productive, globally competitive econ-
omy, shaped by the government and driven by a pioneering private sector”
(Bahrain Economic Development Board 2008). It also aimed at creating
enough new jobs for its growing population and doubling the income per
capita of its household by 2030. The strategy is an ambitious one, as the
country puts the development of its human capital at the heart of its devel-
opment plans. This is expected to happen through the attraction of for-
eign investment that could provide jobs with high-level knowledge
competences and as a result high wages. Lack of foreign investment after
2011 uprisings undermined the capacity of the state to attain such objec-
tives, hence offering nationals jobs in the overcrowded public sector and
gaining legitimacy through redistributing oil revenues.
Diversication strategy focuses on three main areas for development.
The rst area is the development of the private sector through the promo-
tion of entrepreneurship and supporting innovation and the creation of
national innovation systems across the country. Also, there is a tendency in
the government towards supporting creative industries and creating
knowledge-based and high-value-adding companies, particularly in the
high-tech sector. The second area for development is turning the country
into a global nancial hub. Financial services is the leading sector in the
diversication strategy, with signicant numbers of national and interna-
tional banks and nancial services companies operating in the country
since the 1970s. Up to 2011, Manama was considered one of the key
global nancial cities, and its proximity to the emerging markets in Asia
and the Gulf and its connections with European and US markets have
turned the city into a regional nancial centre for both conventional and
Islamic nance, as well as nancial services. Other key economic sectors
for development have been tourism, services, logistics and manufacturing,
particularly its aluminium industry (e.g. ALBA aluminium smelter). This
adds to the already diversied Bahraini economy, where services and
industry accounted for around 50 per cent of GDP in the 2000s (Koren
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

14
and Tenreyro 2010). The third area is human resources development,
where education plays a prominent role in building a knowledge-based
society. Investments in primary, secondary and higher education, with par-
ticular attention paid to transferable skills and training, are essential for
improving the quality of national workforce and increasing its employabil-
ity in the private sector.
Qatar Diversication Strategy
Qatar also announced its national Vision 2030 in 2008, followed by
Qatar National Development Strategy 2011–2016 that provided a
detailed account of the expenditure and implementation of the eco-
nomic plans. The pace of economic planning and implementation is
much faster than any other GCC member state because of the country’s
commitment to hosting the Fédération Internationale de Football
Association (FIFA) World Cup in 2022. Unlike Oman and Bahrain,
Qatar is less enthusiastic about economic diversication because of its
huge oil and gas reserves. It is estimated that the country has the largest
gas reserves in the world and sufcient reserves to keep oil production
going for the next 45years (Hvidt 2013). This makes the utilisation of
hydrocarbon resources key to future economic development and diversi-
cation. However, the vision is an ambitious one that aimed at trans-
forming Qatar into an advanced country by 2030, capable of sustaining
its own development and providing a high standard of living for its pop-
ulation for generations to come. It also aims at creating a knowledge
economy in a way that makes the country a regional hub for knowledge
and high-value industrial and economic activities. One of its key meth-
ods of achieving this end is economic diversication by supporting pri-
vate enterprises, promoting entrepreneurship, improving the business
climate, reforming labour market and strengthening regional integra-
tion. Progress on these fronts has been slow, despite the fact that Qatar
spent around 5 per cent of its GDP on education in the past 5years, and
built the Education City, with a large number of foreign colleges and
universities facilitating skills and knowledge transfer to young popula-
tion. Hvidt (2013) highlighted a number of factors that could also
explain the slow pace of diversication. The chief among these factors
are the small size of the economy and its consumer base, as well as the
low wage in the private sector vis-à-vis the public sector, which discour-
age citizens from seeking employment in the private sector. Data con-
A. MISHRIF

15
rms that only 0.3 per cent of citizens work in the private sector, while
the percentage of all Qataris in the workforce does not exceed 6 per cent
(General Secretariat for Development Planning 2011). This makes the
prospect of developing a national workforce that is competent to lead on
bolstering the private sector and increase its role in economic develop-
ment and diversication limited.
Kuwait Diversication Strategy
Kuwait is the most dependent GCC country on oil, which accounted for
90 per cent of export revenues, 93 per cent of government income and
45 per cent of GDP in 2011. The Kuwait Vision 2035, announced in
2010, aimed to turn the country into a regional trading and nancial
hub through economic diversication and development. This announce-
ment of the vision was followed by the approval of the rst Five-year
Development Plan (2010–2014) since 1986, in which the government
pledged to spend US$125billion on the implementation of the plan.
Signicant investments have been made in major infrastructure projects
such as the Silk City in Subiyah, the deep-sea container port in Shatt
Al-Arab, and new railway and metro systems, as well as schools and hos-
pitals. The vision expected a greater role by the private sector in these
projects by contributing almost half of their total costs. It also hoped
that the creation of a well-developed infrastructure could attract both
domestic and foreign investment into the country. Previous studies
argue that Kuwait is the least diversied economy in the GCC region,
largely because of its positive scal balance and constant dispute between
the legislative authority (parliament) and the executive power (govern-
ment) that paralyse the decision-making process for many years (Hvidt
2013). There may be a lack of political consensus on the direction of
development, but what really affects the development process is the psy-
chological effects and physical destruction of the First Gulf War
(1980–1988) and Second Gulf War (1990–1991) and how this inu-
ences the perception of decision makers, who are still haunted by the
high levels of insecurity in the region. High political and security risks
are the most discouraging private and foreign investments in Kuwait.
However, Kuwait is currently focusing on developing intangible infra-
structure such as governance, rule of law, transparency and accountabil-
ity in the public sector, with emphasis on the development of human and
administrative capabilities.
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

16
UAE Diversication Strategy
UAE announced its Vision 2021in 2010. The vision provided the general
objectives and aspirations of the UAE government, while the UAE
Government Strategy 2011–2013 spelled out details of specic objectives
and programmes. The vision 2021 aimed that the UAE is to “sustain its
drive towards economic diversication, as this is the nation’s surest path to
sustainable development in a future that is less reliant on oil. This means
expanding new strategic sectors to channel our energies into industries and
services where we can build a long term competitive advantage”. The shift
from oil-based to non-oil-based economic development focused on foster-
ing new high-growth sectors and industries that are internationally competi-
tive. This means that growth in the UAE economy would be driven by
knowledge and innovation; fuelled by investment in education, R&D and
vocational training; supported by strengthening the regulatory and legal
systems; and encouraged by the creation of high-value-added sectors in
order to enhance the country’s competitiveness. The means of diversica-
tion has taken several streams, most notably the concentration on the devel-
opment of the SMEs sector and traditional manufacturing industries,
including petrochemicals, fertilisers, plastics and metals. Signicant invest-
ments have also been made in high-tech industries such as renewable ener-
gies and aviation. Other sectors of successful diversication are services, real
estates, cultural tourism, healthcare, construction and logistics.
Several factors facilitated economic diversication in UAE.The chief
among these factors are the political and economic setting, the business-
friendly environment, openness to international trade and investment,
political support to entrepreneurial and economic activities, and attrac-
tiveness of the country to foreign direct investment outside the hydrocar-
bon sector. These factors complement the developmental state model that
is still visible in UAE in the form of state entrepreneurship and state-led
economic development. As explained by Mishrif and Kapetanovic in
Volume II, these factors have been instrumental and effective in setting
Dubai as a model for economic diversication, with oil accounting for
only 1.4 per cent of GDP in 2013. The success story of Dubai is looked
upon for emulation not only in Abu Dhabi, Doha, Manama, Muscat and
Kuwait but also in non-oil-producing countries such as Egypt, Jordan,
Tunisia and Morocco. Surprisingly, the Vision 2021 illustrates a striking
contrast between allocating a limited role for the private sector in eco-
nomic development and supremacy of the state as the principal actor and
A. MISHRIF

17
driving force in economic planning and development at the time when the
country claims to be operating in a globalised market economy. Hvidt
(2013) labelled this special economic model “diversication without pri-
vatisation”, a model that is market driven and based on public ownership.
The efciency and success of public sector companies such as the Mubadala
Development Corporation, which create or buy enterprises and operate
them on market terms, elevated them to a level where they become
entrusted to lead in developing the Emirate society.
Saudi Diversication Strategy
Saudi Arabia began its diversication strategy over a decade ago. The
Long-Term Strategy (2004–2024) indicated, among its many aims, that
the Kingdom increases the role of non-oil production in the economy and
reduces the share of oil and gas in total exports from 72 per cent to 37 per
cent by 2024. By 2011, the share of oil in export revenues increased to 85
per cent, while accounting for 85 per cent of government income and 50
per cent in GDP.This unsuccessful phase of diversication was hindered
by the growing rate of youth unemployment, low living standards and
considerable rise in poverty among Saudis mainly caused by decline in
economic growth to an average of 4 per cent that was translated to nan-
cial constraints and budget decits during that period (Saudi Ministry of
Economy and Planning 2010). There was also lack of direction on which
role the private sector would take in economic development, despite the
repeated calls for a greater role of private enterprises in the economy and
liberalisation of the economy after the accession to the World Trade
Organisation in 2005.
In 2016, Saudi Arabia launched its national Vision 2030. The vision
aimed to turn Saudi Arabia into a global investment powerhouse. The
second pillar of the vision that relates to the economy states: “our nation
holds strong investment capabilities, which we will harness to stimulate
our economy and diversify our revenues. We are determined to reinforce
and diversify the capabilities of our economy, turning our key strengths
into enabling tools for a fully diversied future”. The vision identies a
number of measures to achieve economic diversication.
1. The transformation of Aramco from an oil-producing company into
a global industrial conglomerate, expanding its activities beyond the
oil and gas sector.
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

18
2. The transformation of the Public Investment Fund into the world’s
largest sovereign wealth fund, by increasing its assets from SAR
600billion to over SAR 7trillion.
3. Encouraging Saudi companies to become multinational corpora-
tions by expanding across borders and operating in global markets.
4. Development of the manufacturing sector, particularly in armament
and manufacturing of military equipment, machinery and software.
5. Upgrading the administrative system by expanding the variety of
digital services to reduce delays and cut tedious bureaucracy.
6. Improving the business environment, reforming the regulatory sys-
tem and adopting wide-ranging transparency and accountability
reforms and, through the body set up to measure the performance of
government agencies, hold them accountable for any shortcomings.
When it comes to the key drivers of economic development and diver-
sication, the Saudi vision balances between strengthening public sector
governance by restructuring government agencies continuously and
expanding the private sector through a comprehensive privatisation pro-
gramme. The vision seeks to shift the role of the government from provid-
ing services to one that focuses on regulating and monitoring them.
Meanwhile, it seeks to increase the contribution of the private sector,
which is currently less than 40 per cent of GDP, in the economy by priva-
tising some government services and opening new economic sectors such
as healthcare, education, energy, housing, and some municipal services for
private and foreign investment. The vision highlights the commitment of
the Kingdom to provide better opportunities for partnerships with the
private sector through the three pillars: our position as the heart of the
Arab and Islamic worlds, our leading investment capabilities and our
strategic geographical position (Council of Economic and Development
Affairs 2016).
shortfalls InGulf dIversIfIcatIon strateGIes
Previous studies on economic diversication in GCC countries conclude
that diversication has lacked both the pace and depth in policy imple-
mentation (Callen etal. 2014; Hvidt 2013; Seznec 2011; Beblawi 2011;
ESCWA 2001). These studies argue that there seem to be no compelling
reasons to unsettle the current economic structure of these countries.
Industrialisation has been conned only to the hydrocarbon sector,
A. MISHRIF

19
expanding in both the upstream (exploration) and downstream (renery
and distribution), as well as oil-related industries, mainly petrochemicals,
aluminium, steel and fertilisers, which gained its competitive advantage
from low energy cost and state subsidies. Although the expansion in
non-oil industries such as services, banking and tourism has been the
greatest achievement in this domain, the contribution of these industries
to the export and government revenues remained small. Beblawi (2011)
attributes this to the heavy dependence on oil and argues that the expan-
sion in oil-based industries and even import substitution industries is
unlikely to survive in the post-oil era. This argument might reect the
heavy subsidies provided by the state to these industries, which made
them uncompetitive and the protective environment in which these
industries operate.
Beblawi’s argument complements that of Looney (1994), who both
underline the lack of overall industrialisation strategies due to problems
related to the bureaucratic and administrative system, the nature of the
labour forces in the industrial sector that is exclusively dependent on expa-
triates, and insufcient incentives at the production and export levels. At
the regional level, the GCC countries have yet failed to take advantage of
the dynamics of regional integration by coordinating their industrial poli-
cies and allocating industrial activities among member states. The estab-
lishment of the 2003 customs union and 2008 common market, which
created a single external tariff and enabled free movement of factors of
production such as goods, services, capital and labour, have yet had lim-
ited impact on the industrial and wide-ranging economic development of
the GCC member states.
Despite the huge nancial surplus and heavy investment in infrastruc-
ture, outcomes of GCC government policies have fallen short of targets
set out in their national visions, while the challenges of economic diversi-
cation persist. The pace of change in the structure of GCC economies is
very limited because of their heavy dependence on the hydrocarbon sector
to date. National visions stressed the vital role of the state as both regula-
tor and operator in the management of the economy, while calling for the
need to consolidate the public sector, which contributes over 60 per cent
of GDP.The continuity of the allocation state model is also a major chal-
lenge of diversifying GCC economies. Theoretically, diversication could
be a remedy of the problems resulting from the allocation state model by
decreasing volatility and increasing sustainable high-income levels, but
current strategies have neither well-dened mechanisms nor clear mile-
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

20
stones for a gradual shift towards a more production-based model, where
most economic forces, including the private sector, engage actively in the
development process.
role ofthePrIvate sector InGcc dIversIfIcatIon:
theWay forWard
Functioning as a fully agged market economy seems a far distance, par-
ticularly when GCC governments favour the public sector as the main
source of job creation and the engine of growth. The limited role of the
private sector is visible in restricting its investments in areas where the
government does not want to invest in, while most private sector compa-
nies are heavily dependent on subcontracting and outsourcing from state-
owned enterprises. However, the move towards a more production-based
model that fosters the growth of the private sector is gradually emerging.
The Saudi Vision 2030 offers new lights in its call for privatisation and
greater role of the private sector in economic development. The partial
privatisation of Aramco signies a new trend, in which the state, the pri-
vate sector and citizens are engaged in production, and government relies
on proceeds from production to nance social and economic development
programmes.
Although the public sector is still a major force in GCC economies, the
private sector has already made its marks in diversifying Gulf economies.
The private sector has been actively supporting the government in its eco-
nomic reform programmes, particularly widening the scope of sectors and
activities available to private enterprises. This is true in the case of Bahrain,
Oman, UAE and, to a lesser extent, Kuwait, where the attitude of the
private sector towards economic liberalisation is formed in accordance
with its rent-seeking interests. The case of the Kuwait private sector under-
lines the conservative position of this sector towards economic liberalisa-
tion, as many of private enterprises prefer to operate in a protective
environment (Nosova, Chap. 2). Nosova’s analysis underlines the desire of
the private sector to maintain its monopolistic and elitist position with
reserved preferential treatment from authorities, while fearing of opening
up the market for competition, which could expose their inability to com-
pete with foreign companies.
In line with the position of the Kuwaiti private sector, Omani, Saudi
and Emirati private sectors have been seeking new means to overcome
their limited resources and fear of withstanding competition in the Gulf
A. MISHRIF

21
markets. Chief among these methods is the creation of a systemic approach
to integrate public and private enterprises in national strategic projects.
Al-Hinai, Espinosa and Vidgen (Chap. 3) provide a holistic model for
designing a new state-owned enterprise in order to play a greater role in
governmental initiatives towards economic diversication and to create a
platform for a value co-creation and experience sharing. While this model
supports other governmental initiatives towards diversication, such as
generating jobs, employing local workforce and building national knowl-
edge, it could enhance collaboration and promote alliances particularly
with SMEs and connect state-owned enterprises with numerous potential
private companies. Public-private partnerships (PPPs) provide another
avenue for private enterprises to engage with the public sector in large-
scale infrastructure projects. The signicance of PPPs lies in the fact that
infrastructure is one of the key sectors for economic diversication in GCC
countries. As explained in Chap. 4, Iwanami argues that GCC countries
have the potential to benet from PPPs in infrastructure development
through substantial improvement in such services as water supply, sanita-
tion, power generations, electricity, roads, ports and telecommunications,
which, in turn, achieves economic diversication via increased competi-
tion. The importance of regulation for the successful implementation of
PPPs provides an opportunity for private sector companies to share their
concerns over voice and accountability since preparation and implementa-
tion of PPPs often corresponds to the interests and needs of the business
community and society. Practically, PPPs provide an excellent opportunity
to the private sector to be consulted on government regulations; to ben-
et from the large pools of nancial, technological, managerial and
operational capabilities created by the government and the public sector;
and to contribute effectively to the delivery of infrastructure services.
An improvement in the regulatory environment can signicantly
strengthen the role of the private sector in economic development. On the
one hand, the performance of private sector companies is largely affected
by the quality of education system and labour market. Mishrif and
Alabduljabbar (Chap. 5) argue that the failure of the Saudi education sys-
tem to provide good quality education is a major contributing factor to
the high levels of unemployment among young Saudis and their inability
to secure jobs in the private sector. They attribute the deciencies in the
education system to lack of a clear vision set by the Ministry of Education,
the absence of a unied educational strategy and the limited interference
of different factions, mainly religious leaders, in setting the curricula and
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

22
broader education strategies. They also highlight the poor organisational
structures and the centralisation of the ministerial functions at structural
level, while stressing the outdated teaching and learning methods, lack of
transferable and analytical skills, and limited access to information tech-
nology and its utilisation in the learning process. Such deciencies hinder
the prospect of Saudi citizens in participating in the increasingly globalised
marketplace.
On the other hand, the regulatory environment can positively affect the
quality and performance of the private sector in GCC countries. Domestic
and foreign companies are not only governed by various laws that determine
their incorporation, legal structure and business activities, but they are also
affected by the level of efciency and transparency in the legal and regula-
tory systems as well as the administrative system, where corruption, red tape
and lack of information have negative effects on their operation. In the
GCC context, Al-Daffaa argues that the creation of the Saudi Arabian
General Investment Authority (SAGIA) has signicantly improved the
Saudi regulatory environment through regulating, managing and control-
ling foreign investment (Chap. 6). Such improvement in the regulatory
framework has contributed to signicant increase in the levels of FDI
growth, which reached US$36.4billion in 2009 (World Investment Report
2015). With the country now entering an era of (limited) privatisation, the
success of this process depends on the ability of the country to develop its
regulatory system. The privatisation of state-owned enterprises will increase
the number of private and foreign companies, which, in turn, expands eco-
nomic activities in new industries other than the hydrocarbon sector.
Shazia Farooq Fazli and Ayesha Farooq (Chap. 7) take a different stand
to examine the organisational effectiveness of private enterprises and
diversication in the Gulf countries. They use the conceptual model that
incorporates McKinsey’s 7S Framework to assess the extent to which spe-
cic management practices contribute to the effectiveness and productiv-
ity of the organisations and provide competitive advantage. They argue
that the GCC development strategies rely, to some extent, on the local
private sector for diversication, job creation and the building of a more
productive and less oil-dependent knowledge economy. This is why pri-
vate enterprises should redene their boundaries and play their role effec-
tively in economic development, at the time when GCC countries are
undergoing an extraordinary economic and social transformation, a trans-
formation that provides huge investment opportunities for the private sec-
tor in non-oil industries.
A. MISHRIF

23
GCC private enterprises can benet from easy access to capital and
highly skilled foreign labour in their home markets and in sectors that are
not attractive to the public sector such as agriculture and tourism.
Although agriculture contributes less than 1 per cent to GDP in all GCC
countries due to arid climate and shortage of fresh water, this sector has
huge potential for private sector companies because GCC countries import
between 80 per cent and 90 per cent of their food consumption. Bani
(Chap. 8) argues that with demand in the GCC expected to rise signi-
cantly, food imports to the region will increase by as much as 100 per cent;
such rise in demand will require signicant investment in agriculture, a
sector that is exclusively dominated by the private sector. Although GCC
countries do not have a comparative advantage in eld crop production,
they have provided the opportunity to private sector companies to import
most basic commodities and other food, as well as operating in retails and
manufacturing of foodstuffs and beverages. Bani also argues the agricul-
tural sector in GCC needs to boost agricultural output through productiv-
ity increases and promote economic diversication that leads to sustainable
aquaculture, horticulture and poultry. Gulf private investments in agricul-
ture have been expanded nationally and internationally, with many Gulf
companies investing heavily in the acquisition and cultivation of hundreds
of thousands of acres in countries such as Egypt, Sudan and Ethiopia.
Tourism is another promising sector for the private sector. Karolak (Chap.
9) compares tourism models of Bahrain, Kuwait, Qatar, Oman and UAE
to assess the extent to which each of these countries has managed to create
a distinctive place identity and whether these identities are competitive
enough to secure a ow of international tourists in the future. Using the
method of content analysis and critical discourse analysis, her research
brings new evidence to the study of semiotics in tourism in general and
identies some tourism strategy gaps for improvement in the respected
countries and for the GCC region.
Finally, one cannot underestimate the impact of regional integration on
private sector development and diversication in the GCC countries.
Mishrif and Al-Naamani (Chap. 10) underscore the importance of this
dimension by examining the effects of the 2003 customs union and the
2008 common market on economic diversication strategies in GCC
countries. They argue that economic integration arrangements have facili-
tated the internationalisation of SMEs in the GCC region market, by tak-
ing advantage of the free movement of factors of production and
elimination of all barriers to trade in goods and services. They conclude
INTRODUCTION TO ECONOMIC DIVERSIFICATION IN THE GCC REGION

24
that regional integration arrangements have also played an essential role in
facilitating economic diversication in specic sectors such as services and
retails, while more efforts are needed to diversify their manufacturing, so
they can compete internationally.
conclusIon
This chapter provides an overview on economic diversication in the GCC
countries. While dening the concept of diversication, it identied the
public sector, the private sector and sovereign wealth funds as the main
drivers that can accelerate the pace and scope of diversication. The sharp
drop in oil prices by more than 70 per cent since 2014, together with the
political, social and demographic changes that have taken place in the Gulf
region, has made economic diversication a top policy priority in all GCC
countries. This is clearly underlined in the spirit and text of the national
visions and strategic development plans of six GCC countries. Analysis of
these visions and their implementation shows that the countries that have
low proved oil reserves are more enthusiastic to diversify their economy
than those with high levels of proven oil and gas reserves. The chapter
concludes that the private sector has the capacity, enthusiasm and motiva-
tion to participate in economic diversication, particularly in the non-oil
sectors that are not attractive to or left out by the public sector.
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