After nearly 50 years of growth, the debate continues, particularly among Gulf citizens, about the nature of GCC economies. The question is: are they still considered ‘rentier’ states as they were five decades ago? Or have significant changes taken place, marked with a shift towards economic diversification and a reduction in reliance on oil?
What makes it easy to answer this important point is the fact that economics does not rely only on theoretical analysis, as with other human sciences, but hinges on data that either validate theoretical conclusions or not. This holds a significant professional aspect too. The availability of data in an abstract form does not inherently examine the transformations stemming from changing its indicators for each specific period of time.
Based on this understanding, some macroeconomic data can be analyzed to derive conclusions that accurately illustrate the decades-long transformations in the GCC. This approach veers away from populist mobilization that may sometimes be harmful due to its lack of objectivity, as well as the state of despair it creates. And in the absence of a comprehensive evaluation encompassing both its positive and negative aspects.
Our discussion will deal with general indicators, with an acknowledgement that there is disparity in economic diversification among GCC countries, according to the economic policies of each nation.
The data available, sourced not only from GCC institutions, but from specialised international and regional organisations too, indicate that the oil sector accounted for over 90 per cent of GCC states’ GDP in the 1970s. It also constituted the same percentage of exports and revenues in their annual budgets. They were aptly classified as rentier states, given that their economy was almost entirely reliant on oil revenues generated from oil and gas concession agreements.
Setting the diversification template
Following the dissolution of most of these agreements, the GCC nations transferred the ownership of their oil wealth to national companies. This led to a substantial increase in their financial capabilities due to the doubling of oil revenues.
Nevertheless, the infrastructure at that time did not provide the potential for the development of non-oil sectors, prompting them to invest heavily in creating the needed foundations.
At the beginning of the 1980s, the GCC countries began to take significant steps towards diversification. Within a few years, the GCC turned into one of the world’s most important hubs for the manufacture of petrochemicals, fertilizers and aluminum. It also became an exporter of building materials and various food products, rather than just importing them.
Moreover, rather than having three medium-sized airlines, the GCC countries now own and operate a number of the biggest carriers, taking advantage of their strategic geographical location. Which also contributed to significant growth in trade, particularly on re-exports.
Consequently, they attracted sizeable foreign capital, in addition to domestic investments. The creation of financial markets in which strategically vital companies, banks, financial and real estate institutions were listed has contributed significantly to growth rates, which has been among the highest global in recent decades.
Revised mix in GDP
These have led to a fundamental shift in the makeup of the GCC’s GDP. Non-oil sectors now constitute the largest percentage, accounting for 60-70 per cent of the GDP, whereas oil sector makes up 30-40 per cent. These changes have been concurrent with the implementation of financial reforms in some GCC countries.
It is true that oil still constitutes a larger percentage in financing annual budgets, despite the fact that its percentage has decreased. Government spending and overall economic conditions are affected by fluctuations in oil prices. This is natural, and also applies to Norway as an oil-producing country whose economy is affected by developments in the oil market, despite being a developed industrial country with a diversified economy.
While GCC states have made significant strides in diversifying their economies, there is much work to be done and the need to redouble efforts to continue this approach. There are important changes underway to reduce reliance on oil, including production and export of blue and green hydrogen, considered as one of the forms of future energy.
It paves the way to come up with objective conclusions about the economic diversification underway in the GCC…