Introduction

Since the first oil boom in the 1970s, a key objective of the GCC economic development strategy has been to intensify diversification efforts and reduce the heavy dependence on the oil sector by developing a non-oil economy, non-oil exports, and non-oil revenue sources for the government budget. The diversification strategy also aimed at reducing the dominant role of the public sector by promoting growth of the private sector.

At the time of the first oil boom in the early 1970s, a number of basic characteristics hindered diversification and balanced economic growth. The heavy dependence on oil production, limited domestic labor force, and high dependence on imports affected diversification.

Initially, the economic diversification process was driven by uncertainty about the duration of the first oil boom. The focus was on rapid expansion of the physical and social infrastructure in order to provide a broad basis for the development of the economy outside the oil sector. Subsequent sharp fluctuations in oil prices during the 1980s and 1990s generated considerable instability in all the GCC economies and economic diversification became an even higher priority.

In addition to the continued expansion of the physical and social infrastructure, economic diversification in GCC countries encompasses the development of industrial activities, particularly in petrochemicals, and in basic metals industries, as well as in other manufacturing industries. Agricultural production and private (non-governmental) services, including financial services and, more recently, tourism, helped to diversify the economies. Privatization of public utilities and other government-owned enterprises, the reduction of domestic subsidies, and the development of non-oil revenue sources were explicit objectives of economic diversification plans.

During the last three decades, the GCC countries have pursued the objective of diversification with varying degrees of success. There have been many impediments, among them the scarcity of water resources, the limited human resources, the underdeveloped state of capital markets, and the political instability in the region, especially highlighted by the first and the second Gulf wars.

All in all, the process of economic diversification has varied over time in close relation to fluctuating oil revenues. Periods of rising oil prices and revenues have generally distracted the governments from pursuing economic diversification, although the diversification priority became a prime objective again during periods of falling oil prices and rising budgetary deficits.