Five years ago, the Gulf states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates shared a fiscal surplus of some $600 billion; by 2020, the International Monetary Fund predicts that they will have accumulated a combined deficit of $700 billion. Sustained low oil prices could make things even worse. This bad news is yet one more reminder of resource-rich Arab states’ need to build vibrant, diversified economies that can withstand the effects of oil price shocks.
Although Arab governments have long recognized the need to shift away from an excessive dependence on hydrocarbons, they have had little success in doing so. Iraq, for example, set economic diversification as a core policy objective in one of its first five-year development plans in 1965—yet the country has only become more dependent on oil over time. In Qatar, Kuwait, and Saudi Arabia, too, diversification has been a central, yet largely unrealized, development goal since the 1970s. Even the United Arab Emirates’ economy, one of the most diversified in the Gulf, is highly dependent on oil exports.
Why have Arab governments consistently failed to diversify their economies despite tall promises and grand plans? The answer has more to do with politics than economics. Indeed, if diversification were as simple as importing technical blueprints from states that have already diversified their economies, such as Botswana, Malaysia, and Norway, it would already have been accomplished.
Economic diversification carries deep power implications for ruling elites.
The trouble is that in many Arab economies, good economic policies rarely constitute good politics, especially for ruling elites. This is because the structural changes demanded by economic diversification—specifically, the production of a greater number and variety of high-value goods—promise to empower business constituencies that, flush with new income, could potentially challenge the ruler. In Kuwait, for example, the rise of an independent merchant class could undercut the reliant on foreign labor.
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