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In the Gulf, oil was discovered in the early 20th century. This is the 21st century and these gulf countries are still far behind diversifying their economy.

Why? Why didn't the Gulf countries diversify their economy so that they can become less dependent on oil? What/who stopped them diversifying their economy?

Take for example KSA: The first details of economic diversification were announced on 25 April 2016 by Crown Prince Mohammad bin Salman. The first discovery of oil was in 1938. I wonder what they were doing during the past 82 years!

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    Good question, although maybe more appropriate for Economics SE. See "resource curse" and "Dutch disease" for some relevant ideas.
    – Brian Z
    Sep 4 '20 at 14:27
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    Which countries? There are a lot of differences between, say, UAE and Iran. That will mean different answers for different countries - and your assumption that they haven't diversified their economies might not be true for all oil-producing Gulf countries.
    – Just Me
    Sep 4 '20 at 14:32
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    What exactly do most of those countries have to diversify their economy with?
    – jamesqf
    Sep 4 '20 at 18:11
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    Those with dwindling resources rely on tourism. Oil barons rely on easy profits from natural resources. Although these countries have expanded educated and professional skills, the benefits are eroded by global expansion and take time. Sep 4 '20 at 20:49
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    @David Hammen: Singapore is/was a democracy? Coulda fooled me: en.wikipedia.org/wiki/Lee_Kuan_Yew
    – jamesqf
    Sep 6 '20 at 6:06
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When your economy is based on a single commodity diversification is really difficult. There is one place in your economy where the money is, and the power follows the money. Anything else is going to be a money sink for the foreseeable future, which in turn means it is going to have zero political power: any job in a money sink will exist only at the whim of the national leaders.

This means that anyone with talent and ambition will gravitate to the commodity industry, leaving the diversification initiatives to chairwarmers and sinecure seekers. This in turn dooms the diversification initiatives to failure.

On top of that, its hard to find any industries that actually make sense in the Gulf countries. They are hot and dry, which makes them unpleasant and expensive to live in. Hence mass industry with big factories is out (and require better transport links to markets anyway), but people who do knowledge work have no particular reason to go there either. Starting a knowledge-work industrial cluster looks like a good idea on paper, but the really bright people who might make such a place profitable can take their pick of nice places to live, and a desert theocracy is very low on their list.

Some of the smaller states have managed to make money out of tourism, tax havens and being the half way point between China and Europe. But the tax haven business exists only as long as America, the EU and (increasingly) China decide to tolerate it, and they probably only tolerate it because shutting it down would make the oil trade difficult. The tax haven business is under increasing pressure from around the world, and its a fair bet that once the oil goes the tax haven business will go too. Once that goes the tourism goes, and all that is left is refuelling (or maybe by then recharging) airliners that are going somewhere else.

Saudi Arabia has the Haj, which guarantees it a certain amount of tourism. But that's not diversification and won't support anything like its current economy.

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They Do.

  • Saudi Vision 2030 is a strategic framework to reduce Saudi Arabia's dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation, and tourism.
  • UAE Economic Diversification Efforts Continue to Thrive.
    In 2015, 70 percent of the UAE’s GDP came from non-oil sectors, including media, telecom, tourism, manufacturing and commercial aviation.
    The UAE has been undergoing somewhat of a macroeconomic revolution in recent years, fuelled by a desire to transition from the one commodity economy it was once so well known for.
  • Kuwait’s National Vision 2035 articulates […] vision to transform the country into a leading financial and commercial hub. It focuses on reducing reliance on hydrocarbon exports, creating new employment opportunities for Kuwaiti nationals, upgrading infrastructure to diversify the economy and providing a sustainable living environment.
  • Qatar National Vision 2030 strives to create a balance between an oil-based and a knowledge-based economy, helping diversify the country’s economy and guaranteeing a stable and sustainable business environment.

This list skips Iraq, Iran, and several other Gulf countries, but I'm sure you could find similar declarations there as well.

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  • Take for example KSA: The first details were announced on 25 April 2016 by Crown Prince Mohammad bin Salman. The first discovery of oil was in 1938. I wonder what they were doing during the past 82 years!
    – user366312
    Sep 5 '20 at 4:57
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    ....selling oil?
    – Obie 2.0
    Sep 5 '20 at 6:52
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    There's a vast difference between government programs to do something on an economic level and an actual beneficial outcome resulting from those plans. I assume the OP's question was about outcomes, not pious intentions. Sep 5 '20 at 18:58
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  • All four (KSA, Quatar, Kuwait and UAE) wants to (partly) compete in the same sectors. Will all of them succede ? Can they ? Sep 6 '20 at 11:39
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+1 to Paul Johnson's warnings about the challenges of diversification (how many times did Microsoft tank their earnings with failed attempts, until Azure brought success at last?) and the real inherent challenges from the Gulf's environment.

Another factor is that many of the Gulf oil states do not have free political systems, but are rather ruled by hereditary kings/nobility.

To buy consent from their population, they've put in place extensive welfare systems that disincentivize work from citizens. Hard labor is then performed by immigrants from poor countries, often under precarious conditions. While knowledge work is performed by expats, with generous living allowances under supervision from citizens who, reportedly, often don't really do, or know, much, having never performed grunt work themselves.

Another facet of buying political support is giving too much influence over school curriculum to religious authorities at the expense of teaching work skills.

Meanwhile, those citizens who are competent and highly skilled may very well wish to emigrate to countries with more tolerant social customs and participative political systems.

Given the lack of non-oil resources and small sizes, re-inventing themselves as Singapore-in-the-Gulf sounds attractive, but mostly they don't seem to have a local workforce with the skills to support that endeavour at this point in time.

Tourism is a possibility, but many people from outside the Middle East either dislike the restrictions on alcohol and sexual activity or disapprove of the migrant labor conditions used to support the tourism industry.

Ironically perhaps, a possible boost to their economy would be embracing large scale solar power generation and export as they have both the climate and empty lands to carry out it out.

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  • I did think about the solar power, but the trouble with electricity is that it is difficult to transport over intercontinental distances. Unless we have some massive breakthrough in battery technology, or we can efficiently use the electricity to generate ethanol, a solar farm in Saudi Arabia is no use for anything except powering Saudi air conditioners. Sep 5 '20 at 19:20
  • @PaulJohnson not totally sure. there is talk about high capacity transmission lines, but in the short term you are probably correct. besides, maybe you can just suck out CO2 out of the air or generate synthetic fuel, both of which require lots of energy. Sep 5 '20 at 19:32
  • All that stuff is at the lab demonstrator stage, along with other stuff like flow batteries. Maybe one day it will get them back into the energy business. Or maybe fusion energy or modular nukes will solve the problem, and the gulf states will be left with zero. All this is off-topic speculation. Sep 6 '20 at 6:59
  • With regards to solar power : the distance to central europe isn't that big. So with HVDC it could be doable. But Algeria is closer.... Sep 6 '20 at 11:41
  • @PaulJohnson Oh, no more off topic than iffy speculation about running an economy by refuelling jets, in an era of point-to-point flights on very long distance routes ;-) a lot alternative energy stuff is lab/R&D level right now, but the actual physics of sunshine and available land is immutable - you either have it or you don't and global warming isn't going away anytime soon Sep 6 '20 at 21:42
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Three answers have already been posted but I will post yet another because this will be the first one that advocates specialization.

In 1808 Robert Torrens wrote...

I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broadcloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange.

This means do not make broadcloth and lace if you can get more lace by making only broadcloth.

The arithmetic justification for specialization is at this link.

Link to a description of comparative advantage.

In general this means you need to see a financial benefit to diversification and it has to be better than the benefit to specialization. It might not be. For example, upon the 1930s discovery of oil in the Middle East, if they had predicted a large part of the vehicle market would be equipped with electric propulsion by the year 2000 they might have considered diversification sooner. By the year 2000 it turned out almost no cars were electric so whoever had that idea might draw the ire of regimes and whatever punishment might be appropriate.

It can be hard to get the timing right. Children of the 1970s mocked the internal combustion engine as absurdly retro. I mean STEM-oriented children of course. Yet by the 1990s they became adults facing few alternatives to driving cars with internal combustion engines. For all I know people further back in history had similar views.

You wrote...

I wonder what they were doing during the past 82 years!

That remark is a little unfair to Middle Eastern oil producing countries if you consider the uncertainty they faced and the fact that they have been diversifying. Examples of diversification are listed in another one of the answers posted. Some position between extreme specialization and diversification will strike a balance between wealth and risk. Being highly specialized is in itself not a sign of a bad strategy. It is necessary to look at other properties before criticism.

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  • +1 for Torrens, I always associated this theory with David Ricardo. However, it may not be totally applicable: if everyone is busy doing either broadcloth or lace, then it makes sense to reason only by comparative advantage. If however, only 20% of the population is doing broadcloth, then perhaps diversifying into lace would be a good idea. Where I am getting at is that the Gulf state population can't be fully employed via oil-related economic activities only. Oil production and processing is just not that labor-intensive. Having them do "other stuff" makes sense for that reason. Sep 8 '20 at 20:15
  • @ItalianPhilosophers4Monica Please don't take the example literally. There is no such thing as a 2 product world. If 20% of England is producing broadcloth there exist arithmetic examples that show a gain from further specialization, in other words, 21%. I leave it to you to find it if you care. It would be paradoxical if it only made sense when recommending a shift to 100%. There also exist arithmetic examples recommending a shift from 20% to 19%.
    – H2ONaCl
    Sep 8 '20 at 22:14
  • @ItalianPhilosophers4Monica Having Gulf states doing other stuff is not for outsiders to decide. Outsiders cannot know the value of leisure to the person who is at leisure.
    – H2ONaCl
    Sep 8 '20 at 22:16

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