Why didn't the Gulf countries diversify their economy in the last 70 years so that they can become less dependent on oil?

Question

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!

Answer 1

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.

Answer 2

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.

Answer 3

+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.

Answer 4

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.