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The Gulf Cooperation Council Economic Development Research Paper


Introduction

A strong, reliable, and sustainable economy is always the objective of every nation across the world. Globally, oil-producing countries have continuously played a significant role in the international economy.

The Gulf Cooperation Council (GCC) is a renowned political and economic union, specifically for the Arab states, mainly depending on production of oil for economic development (Coury and Chetan 1). The union has played a pivotal role in ensuring peace and economic expansion in countries covered by the union.

Countries in the GCC have prospered in their economies through economic development strategies and successful transformation agendas. However, recent studies have indicated that some countries within the GCC are threatening their economic power by over depending on oil production as the chief financial resource.

Since gas and oil are exhaustible resources, there is a growing need to diversify economies in the GCC (Looney 138). This paper investigates economic diversification in Qatar compared to Kuwait and Saudi Arabia.

Literature Review

Countries in the Middle East have found oil to be the most precious natural resource, which truly has been quite imperative in enhancing their economic growth.

For several decades, most countries in the Middle East have ranked top in the global oil production overview, with the majority of them depending on oil and natural gas wealth as major commodities for economic intensification.

According to Shediac et al. (2), the Gulf Cooperation Council, including countries like Bahrain, Kuwait, Oman, Qatar, the Kingdom of Saudi Arabia, and the UAE are the largest oil-producing nations covering up to 80 per cent of the overall global oil production.

Oil in the GCC union started being the most appropriate economic booster since its discovery several decades ago, with the global wars revolving around oil production centres. However, oil boom within the GCC union seems to be losing its capacity gradually, which became eminent in years 1973-74.

Conventionally, despite the triumph associated with the GCC as the greatest oil-producing nations, something seems to be going wrong.

Previous studies have continuously indicated that the GCC economies have consistently been dependent on natural resources for growth by investing heavily on oil and gas production and leaving other non-oil sectors like agriculture, manufacturing, and hospitality overtly underutilised and underdeveloped (Basher 3).

This aspect may best explain the reason behind economic predicaments that struck the GCC union during the global financial credit crunch and collapsed oil prices that lasted for decades from late 1980s to 1990s and even currently in the 21st century (Basher 2).

With the existing socio-economic difficulties and financial problems worsened by unprecedented changes in the climatic conditions, concern has risen over the GCC and other oil-producing to change their propensity of depending on oil as the main economic commodity to other profitable sectors. Due to the prevailing pressure, several transformational changes are emerging within the GCC.

The GGC union has developed several strategies to avert the pressure on oil. Some countries have almost completely shifted their economic activities from oil production to depending on public sector activities (Basher 3).

Diversification within the GCC has been successful despite the fact that these countries face daunting challenges in diversifying, with Kuwait and Saudi Arabia diversifying through other potential sectors, including agriculture, manufacturing, and hospitality industries.

In a bid to reduce its dependence on oil, Qatar has been investing heavily on natural gas production, which plays only a partial role in protecting the country’s unfavourable oil price fluctuations that affect national economic condition (Basher 4).

Compared to Kuwait and Saudi Arabia who have diversified in almost all non-oil sectors, natural gas is barely enough to protect Qatar from depending on oil for economic support.

Problem Statement

Currently, nations within the GCC and others across the Middle East regions depending on oil production for economic growth are calling for enhancement of a diversified economy.

Research noticed that the level of global oil production is gradually diminishing with climatic conditions and over-exploitation of natural resources exacerbating the situation.

On noticing this, Middle Eastern governments, especially those under the GCC, have formulated economic development and transformation agendas (Shediac et al. 1).

In this context, transformation agendas principally involved diversification of economy targeting to shift from depending on single economic commodity to well-diversified ones from a range of profitable sectors.

Given that oil and natural gas revenues are exhaustible resources, the GCC governments have started substituting them with other considerable resources to enhance sustainable economy (Coury and Chetan 1).

Contrarily, Qatar has opted to shift to natural gas, which is still an exhaustible natural resource to avert the pressure on the oil consumption, making a null change.

Methodology

In a bid to provide empirical evidence needed to reinforce the argument in this study, this paper reviewed latest case studies conducted to examine the prevailing condition in the diversification of the economy within the GCC union. Two important case studies remained imperative to this study.

A case study conducted by Basher (1-30), which concentrated on comparative analysis of dependence of oil in three countries, including Kuwait, Qatar, and Saudi Arabia, significantly proved the argument for this study. This study also undertook a quantitative assessment of the determinants of the business cycle synchronisation.

The other empirical evidence involved case studies conducted by Shediac et al. (1-3), which principally examined diversification of the economy across the GCC economies. Both studies intended to compare dependency of oil as the main economic commodity to others in a bid to distinguish which country among the three mostly depended on oil as the major economic commodity.

In a bid to provide empirical evidence for the first study synchronicity or rather synchronisation method dominated the first study. Synchronicity, a term used to describe the experience between two that are actually unrelated, but normally coincide under circumstances in a meaningful manner.

This study validated data produced concerning oil output and output from other non-oil sectors for the years ranging from Kuwait (1978-2007), Qatar (1980-2006), and Saudi Arabia (1968-2008).

The study employed a nonparametric filter technique that usually estimates “trend component by minimising deviations from trend, subject to a predetermined smoothness of the resulting trend” (Basher 8). This aspect allows the estimation of synchronicity of oil output gap of the respective GCC economies.

On the other hand, a case study of the GCC, the G7, and developed economies countries were significant in the study. Shediac et al. (2) confirm that this methodology involved measuring Gross Domestic Product (GDP) distribution across all sectors within the GCC, including agriculture and/or manufacturing to ascertain “concentration ratio” and “diversification quotient.”

Results/Discussion

First Argument

By comparing the output ratio of oil and other non-oil sector products from the three GCC member countries, including Kuwait, Qatar and Saudi Arabia, this paper managed to estimate the extend at which each country depended on oil products for economic growth.

As synchronicity measure fluctuated over time, it was significant to include important events like, “the first oil crisis (1973-74), second oil crisis (1979-81), the Gulf war (1990-91) and the recent oil price shock (2005-2008); during all these episodes oil prices significantly increased” (Basher 10).

This element primarily denoted how non-oil sectors depended on the oil sector with synchronicity being highly volatile and different across the three GCC countries.

For Kuwait, the long run synchronicity measure indicated that non-oil sector’s dependence on the oil sector increased during a given period, thus suggested decreased diversification. Comparing to Qatar, the long-run trend of synchronicity was decreasing by then, although this aspect portrayed less meaningful economic diversification.

The synchronicity trend for Saudi Arabia increased diffidently until mid-1990 before declining afterward.

The estimated value of synchronicity in non-oil sectors in Qatar indicated that 53 per cent output of the non-oil sector revealed similar figures/percentage, which coincided with the output gap of the oil sector showing that the level of diversification within the non-oil sectors remained considerably weak.

For the case of Kuwait and Saudi Arabia, using different span of time indicated that the synchronicity measure between oil and non-oil sectors revealed only 45 per cent for Kuwait, demonstrating that the level of diversification in non-oil sectors had gradually been increasing (Basher 10).

The case study yielded almost similar results in Saudi Arabia where the synchronicity measure for oil and non-oil sectors produced 46 per cent a trend that like Kuwait demonstrates reduced dependency on oil as the main economic commodity in the two countries.

Basher affirms that this aspect revealed, “Qatar’s non-oil sector shows a slightly higher degree of dependence on the oil-sector relative to Kuwait and Saudi Arabia” (10).

Second Argument

In a bid to provide empirical evidence to this paper to prove the argument between oil dependency in Qatar and Kuwait together with Saudi Arabia, the study investigated the Gross Domestic Product (GDP) distribution across the three GCC economies, including Qatar, Kuwait, and Saudi Arabia.

Following the case study conducted by Shediac et al. (2), it became apparent that for a country to have a sustainable economy, several measures of diversification must reflect. Diversification is achievable, where the GDP reveals an even distribution across a variety of economic sectors (Srinivas 5).

Therefore, to measure the contribution of GDP across sectors in the three countries, the study involved two important concepts, which are measurable and normally signify diversification of an economy.

Shediac et al. affirms, “The concepts of economic concentration and diversification can be captured with the computation of the respective point estimators of concentration ratio and diversification quotient for the sample of studied economies” (3).

Table 1: Economic Concentration and Economic diversification

Latest Figure revealing data sample in the year 2005
Qatar Kuwait Saudi Arabia
Economic Concentration (%) 39% 33% 28%
Economic Diversification (%) 2.59% 3.0% 3.63%

(Source: Shediac et al. 3)

As demonstrated, the table only involved comparative figures for three GCC economies, viz. Qatar, Saudi Arabia, and Kuwait.

Research has demonstrated that economic concentration quotient and diversification quotient are significant determiners of economic diversification that predominantly depend on a range of economic sectors for economic development (Shediac et al. 3).

Normally, “the concentration ratio measures a nation’s concentration in a given sector by taking the sum of squares of percent contribution to the GDP” (Shediac et al. 3). Countries with high economic concentration normally suffer from volatility in the economic growth and fluctuating economic cycles.

In explainable manner, in the case of high economic concentration a country normally depends on vulnerable external events, including changes in the prices of dominant commodities a case eminent in Qatar’s economic concentration.

From the source of the above data, from the three GCC countries sampled for this study, Qatar ranks top in the economic concentration compared to all other GCC countries.

However, comparing the figures for the three countries in the GCC economies as used in this study, Qatar recorded highest economic concentration of 39 per cent, followed relatively close by Kuwait with about 33 per cent and finally Kingdom of Saudi Arabia with 28 per cent.

The essence of these figures is to provide an overview of how high concentration correlates with economic diversification where high economic concentration reveals high reliance of economic activity in the three GCC countries on the oil and gas sector.

Normally, higher economic concentration depicts low diversification in economical terms. Based on the above table, Shediac et al. note, “Qatar tops amid the three GCC countries with highest concentrations in terms of sector contribution to GDP and thus, exhibits the lowest diversification scores” (3).

According to studies conducted to investigate the contribution of non-oil sectors to the GDPs across the three GCC nations, comparative analysis revealed that Qatar depends considerably high on oil than both Kuwait and Saudi Arabia.

Both studies conducted by Basher (15) and Shediac et al. (6) demonstrate that Qatar has heavily invested on oil than other sectors. Screening through sectors like manufacturing and agriculture in the three GCC countries, Shediac et al.

(7) concluded that the oil industry in Qatar is relatively highly depended by other sectors that in Kuwait and Saudi Arabia, which is an evidence to demonstrate how Qatar heavily relies on oil than the other two countries.

Srinivas (11) postulates that the monopolised oil production sector in Qatar has forced researchers to cite this element as the main cause of lack of diversification in the country, thus exposing it to dangerous events like global price fluctuations.

Conclusion

Based on the empirical evidence provided by the two case studies to prove the argument for this study, it is evident that Qatar has continuously depended on oil production as compared to Kuwait and the Kingdom of Saudi Arabia.

Comparing figures on the economic concentration and economic diversification of the three GCC countries, Qatar ranks top in the economic concentration and the lowest diversification quotient, whereby the higher the economic concentration the lower the diversification in economic terms (Shediac et al. 3).

On the other hand, Basher (15) used the synchronisation technique, where synchronicity referred to similar situations coincided with each other. As both oil and natural gas revenues are exhaustible, all GCC nations, especially Qatar, should be cautious on diversification.

Works Cited

Basher, Syed 2010, . PDF File. Web.

Coury, Tarek, and Dave Chetan 2009, . PDF File. Web.

Looney Robert. “The Gulf Co-operation councils caution approach to economic integration.” Journal of Economic Cooperation 24.3 (2003): 137-160. Print.

Shediac, Richard, Rabih Abouchakra, Chadi Moujaes, and Ramsay Mazen 2008, Economic Diversification: The Road to Sustainable Development. Web.

Srinivas, Kastoori. “Economic Development of GCC Countries: Risks and Challenges: An Overview.” Indian Journal of Business Review 4.1 (2011): 1-14. Print.

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IvyPanda. (2019, October 16). The Gulf Cooperation Council Economic Development. Retrieved from https://ivypanda.com/essays/economic-diversification-in-the-gcc-2/

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"The Gulf Cooperation Council Economic Development." IvyPanda, 16 Oct. 2019, ivypanda.com/essays/economic-diversification-in-the-gcc-2/.

1. IvyPanda. "The Gulf Cooperation Council Economic Development." October 16, 2019. https://ivypanda.com/essays/economic-diversification-in-the-gcc-2/.


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IvyPanda. "The Gulf Cooperation Council Economic Development." October 16, 2019. https://ivypanda.com/essays/economic-diversification-in-the-gcc-2/.

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IvyPanda. 2019. "The Gulf Cooperation Council Economic Development." October 16, 2019. https://ivypanda.com/essays/economic-diversification-in-the-gcc-2/.

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IvyPanda. (2019) 'The Gulf Cooperation Council Economic Development'. 16 October.

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