The decade that has just closed witnessed the development, in an increasing number of countries of the Gulf Cooperation Council (GCC), of concerted national visions to guide their economic diversification agenda. These visions managed to capture a broad consensus among the elites on key policy objectives, including embracing globalization, achieving economic competitiveness, and promoting social progress. Furthermore, despite differences in their formulation and focus, the common aim is to leverage non-renewable petroleum resources for sustainable development and prosperity. But because of the initial distribution of resources and the various policy preferences and constraints, countries should be expected to choose their own path and pace to that destination. This in turn leads to many questions, including: How pressing is the urgency for economic diversification? What are the key drivers of policies? How do these policies translate into strategies? How coherent and effective is the implementation? What are the main problems, challenges, and handicaps policy-makers have been facing as they progress?

This paper explores some of these issues in five parts. As a brief background, Part 1 outlines the structural economic vulnerabilities of the GCC countries. Part 2 derives a viable concept of diversification and measures the extent of the countries’dependence on a single source of income. Part 3 highlights the challenges to longterm growth they face and the resulting arguments for stepping up diversification. Part 4 provides a critical assessment of current diversification strategies and programs. Part 5 assesses the enabling factors and handicaps. In each part, specific issues pertaining to Saudi Arabia are highlighted.

Structural Economic Vulnerabilities

Despite their diversity in terms of size, resource endowment, and financial strength, the GCC countries display similar vulnerabilities. At their core lies a series of macro-economic imbalances, observable in the structures of trade, gross domestic product (GDP) and governments’ budget receipts. Petroleum exports, which include crude oil, oil products, natural gas and natural gas liquids (NGLs), accounted for 78 percent of total exports, while the value added of the petroleum sector represented 49 percent of aggregate GDP in most recent statistics. More dramatically, the share of export-based fiscal revenues in total budget resources was close to 82 percent. One consequence is the extreme vulnerability of GCC economies to the vagaries of world oil markets.