Introduction

While GCC economies are still rent-dependent, they have reached a level of diversification and depth in non-oil sectors that was unimaginable 30 years ago: Goods and services produced by large telecommunications, industry, and logistics companies are increasingly exported into the wider Middle East as well as the rest of the world.

To some extent, this diversification process results from a natural maturation of the local business class that has been part of a rent recycling system for decades which has allowed it to accumulate considerable resources.

The boldest, most impressive diversification steps, however, have by and large been taken by rent-financed public industries, which in a number of cases have been remarkably successful. The story of state-owned enterprises (SOEs) in the Gulf has not yet been appreciated by development economists or even by most regional economic experts, although it is pivotal for understanding the GCC diversification process as well as, arguably, opportunities and limits of public enterprise development in resource-rich countries more generally. The present paper represents a first attempt to systematically describe and explain the successes of Gulf SOEs from a political economy perspective, drawing on non-Gulf oil-rich cases to underline its core arguments.

Although economists increasingly agree that the state plays an important role as facilitator of economic development, there is still near-consensus that it should not play a direct role in the production of private goods and services. Another received wisdom is that oil-rich states suffer from particularly bloated and inefficient public sectors. State-owned enterprises outside of the infrastructure and utility sectors are generally seen as a bad, outmoded, and fiscally deleterious idea – especially in rentier states, which derive all or a substantial portion of their income from natural resources. Several of these states have had catastrophic experiences with state-led industrialization.