Economic Diversification in the Middle East, With a Focus on GCC Initiatives 

By Skylar Walta

-Junior Fellow, Middle East Studies


Many countries in the Middle East have long been dependent on oil and gas exports as their primary streams of revenue. This puts countries in a precarious position as oil and gas reserves will eventually run out. Bahrain and Oman face the most urgent situation, with Bahrain’s reserves expected to run out within the next decade, and Oman’s reserves expected to run out within the next twenty five years. Furthermore, even for countries not facing an imminent depletion of oil reserves, oil revenues are forecasted to decline amidst reduced global demand around 2040.1 Countries in the Middle East are thus facing pressure to diversify their revenue streams to depart from relying solely on hydrocarbons to propel their economies. The Gulf Cooperation Council, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, has been placing an emphasis on its goals to diversify their economies. There are a variety of possibilities in terms of pivoting from an economic reliance on oil and gas.

One method is by avoiding projects in the private sector that require ongoing government support or subsidies. Such initiatives which are often linked directly or indirectly to government contracts are in turn funded by oil and gas revenues. Future economic development and growth should be built upon small and medium sized enterprises (SME’s) and startups.2 When private sector activity is linked to oil and gas funded government contracts, it tends to be at the expense of competitive startups and SMEs, while benefiting private companies and public enterprises linked to the ruling elite class. To promote the growth of SMEs and startups as the foundation of future economic prosperity, GCC states will need to prioritize an economic strategy which will clearly lay out the parameters for public enterprises in terms of which sectors and industries they will operate in, in order to ensure they don’t interfere with other sectors. To maintain this strategy, GCC governments will also need to improve their transparency when it comes to subsidies towards enterprises. As previously mentioned, the extent of these subsidies and support should be limited.

Another strategy GCC countries are engaging in the short run is to tap into their sovereign wealth funds (SWFs) which are state-owned investment funds. These funds have accumulated $2 trillion in financial assets over the past several decades. However, these are merely conserved funds, and the International Monetary Fund estimates that GCC countries will deplete this wealth by 2034, perhaps even sooner, if they do not make sizable economic and fiscal reforms.3

One major way in which GCC countries are able to diversify their economies is through sports to expand future tourism and foreign direct investment. Qatar is an excellent example of such a strategy. Qatar sought to improve their standing as a global sports hub by hosting the FIFA World Cup in 2022, as well as 14 major sporting events in 2023. Furthermore, Qatar has established the first sports business district in the region, which aims to create business opportunities within the private sector, as well as to draw in foreign investments into Qatar’s growing sports industry, including the eSports industry.4 Qatar solidifying itself as a sports event hub is also an investment into the country’s tourism sector, by showcasing the cultural and entertainment dimensions that it offers.

It is important to mention that efforts to expand Qatar’s sports and tourism industry has not come without costs. A significant number of migrant workers lost their lives while erecting infrastructure for Qatar in the decade leading up to the world cup. It is difficult to determine a close approximation of the number of migrant worker lives lost as a direct result of the world cup preparations, with possible figures ranging from 400 to upwards of 6,500 workers.5 Despite the fact that we may never have an exact figure, Human Rights Groups such as Human Rights Watch have held the opinion that evidence suggests the death toll is in the thousands. The extreme hours and unsafe conditions that migrant workers face are a symptom of a more structural inequality that must be addressed in Qatar. While Qatar needs massive amounts of cheap labor to sustain its goals of creating a booming sports industry, it is important to ensure that economic growth does not come at the expense of human rights. More regimented safety regulations and protections for workers should be at the forefront of future sports event endeavors for Qatar.6 This is also indicative of a broader theme which GCC countries should take into account, which is that economic diversification and growth in non hydrocarbon sectors often puts a strain on the labor force, particularly when it comes to workers rights. It is important that these rights and protections are prioritized in tandem with economic diversification for sustainable development.7

Other GCC countries have also sought to expand non hydrocarbon sectors over the past several years. Bahrain has placed an emphasis on its tourism industry, as well as the service sector and investments into continuing infrastructure projects. The United Arab Emirates has displayed promising performance in their investments into tourism, real estate, construction, transportation, manufacturing, and capital expenditure. Diversification is vital to increasing non-oil exports and generating employment in a variety of sectors. Despite a downturn in oil production during 2023, the World Bank notes that the GCC region showed notable growth in non-oil sectors. This is evident by the growth in the Saudi Arabian private sector workforce, which reached 2.6 million in early 2023. Also of note, the labor participation of women in Saudi Arabia increased from 17.4 percent to 36 percent between 2017 and 2023.8 This surge in female labor force participation (FLFP) has actually led to decreasing rates of unemployment in Saudi Arabia. The increase in FLFP is present across all age groups and education levels, and sees women engaging in job opportunities across all economic sectors. This FLFP surge comes as a result of Saudi Arabia’s Vision 2030 which reduced barriers for women to enter the workforce, and led to shifts in social norms towards women in the labor force as facilitated through a focus by the government on effective communications.9

Overall, the need for economic diversification amongst oil and gas dependent economies in the Middle East is a pressing issue as oil and gas reserves, along with conserved wealth from SWFs, nears depletion in the coming years. GCC countries have outlined goals and begun to take initiative by investing in other sectors of the economy, including tourism, services, real estate, manufacturing, and more. Qatar is an example of the importance of balancing human rights considerations with economic initiatives, as rapid growth often runs the risk of causing detrimental effects to the labor force, particularly citizens already facing marginalization.

Looking to the future, while efforts made thus far have been paying off, there is more work to be done by GCC countries to steer their economies away from dependence on hydrocarbons. Such efforts should include an emphasis on separating private sector activity and startups from government subsidies which are funded by oil and gas revenues. Furthermore, governments should improve transparency in terms of state funded activity, in order to make clear which sectors are truly independent of hydrocarbon related funding. Countries should continue to invest into capital expenditures, as well as encouraging saving and investment on the individual level amongst citizens, which is economically beneficial for future consumption. This is a way of involving citizens more closely in economic diversification.10(brookings) Engaging in some of these behaviors and strategies can support the necessary economic diversification and growth that the GCC hopes to achieve.

1 Nader Kabbani, Nejla Ben Mimoune, “Economic diversification in the Gulf: Time to redouble efforts,” Brookings.edu, Brookings Institution, 2021, https://www.brookings.edu/articles/economic-diversification-in-the-gulf-time-to-redouble-efforts /.

2 Ibid.3 Nader Kabbani, Nejla Ben Mimoune, “Economic diversification in the Gulf: Time to redouble efforts,” Brookings.edu, Brookings Institution, 2021, https://www.brookings.edu/articles/economic-diversification-in-the-gulf-time-to-redouble-efforts /.

4 “Investment Opportunities in Qatar's Sports Sector,” Invest.qa, Invest Qatar, 2023, https://www.invest.qa/en/sectors-and-opportunities/sports.

5 Armani Syed, “Why We May Never Know How Many Migrants Died Erecting the Qatar World Cup,” Time.com, Time Magazine, 2022, https://time.com/6237677/qatar-migrant-deaths-world-cup/#:~:text=In%202021%2C%20The%2 0Guardian%20reported,World%20Cup%20a%20decade%20ago..

6 Ibid.

7 “Building economies that place people’s human rights at the center,” Ohchr.org, United Nations Human Rights Office of the High Commissioner, 2023, https://www.ohchr.org/en/stories/2023/04/building-economies-place-peoples-human-rights-cente r.

8 Shahd Alhamdan, Ashraf Al-Saeed, “Economic Diversification Efforts Paying Off in GCC Region but More Reforms Needed,” Worldbank.org, World Bank Group, 2023, https://www.worldbank.org/en/news/press-release/2023/11/22/economic-diversification-efforts-p aying-off-in-gcc-region-but-more-reforms-needed.

9 Ibid.

10 Nader Kabbani, Nejla Ben Mimoune, “Economic diversification in the Gulf: Time to redouble efforts,” Brookings.edu, Brookings Institution, 2021, https://www.brookings.edu/articles/economic-diversification-in-the-gulf-time-to-redouble-efforts /.

References

Kabbani, Nader. Ben Mimoune, Nejla. “Economic diversification in the Gulf: Time to redouble efforts.” Brookings.edu. Brookings Institution, 2021.

https://www.brookings.edu/articles/economic-diversification-in-the-gulf-time-to-r edouble-efforts/.

“Investment Opportunities in Qatar's Sports Sector.” Invest.qa. Invest Qatar, 2023. https://www.invest.qa/en/sectors-and-opportunities/sports.

Syed, Armani. “Why We May Never Know How Many Migrants Died Erecting the Qatar World Cup.” Time.com. Time Magazine, 2022.

https://time.com/6237677/qatar-migrant-deaths-world-cup/#:~:text=In%202021% 2C%20The%20Guardian%20reported,World%20Cup%20a%20decade%20ago..

“Building economies that place people’s human rights at the center.” Ohchr.org. United Nations Human Rights Office of the High Commissioner, 2023.

https://www.ohchr.org/en/stories/2023/04/building-economies-place-peoples-hum an-rights-center.

Alhamdan, Shahd., Al-Saeed, Ashraf. “Economic Diversification Efforts Paying Off in GCC Region but More Reforms Needed.” Worldbank.org. World Bank Group, 2023. https://www.worldbank.org/en/news/press-release/2023/11/22/economic-diversifi cation-efforts-paying-off-in-gcc-region-but-more-reforms-needed.

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