Does political will have the potential to improve GCC economic diversification?

Abstract

Objectives: This study investigates the role of political will on economic diversification throughout the Gulf Cooperation Council [GCC] countries. The study examines determinants of economic diversification, including economic, demographic, political, and institutional factors. Method: The applied model was estimated using pooled ordinary least squares [OLS], random- and fixed-effect techniques, as well as the Hausman test. According to the appropriate fixed-effect estimation model. The data sample covered the six GCC countries throughout the period from 1996 to 2019. Results: The findings proposed that increased political will can lead to increase of the economic diversification efforts across the GCC region. Particularly, higher government effectiveness indicates lower dependence on oil rent. However, results confirmed that the impact of political stability tends to be associated with greater dependence on oil rent. This suggests that the GCC governments tend to deviate from the process of economic diversification when political environments are improved, reflecting the political-economy model of rentier states across the GCC region. On the other hand, findings showed that the impact of per capita income and oil prices tend to significantly affect dependency on oil correlatively. Furthermore, increased population growth is associated with lower dependency on oil when the labor force expands and can provide more opportunities for economic diversification. Conclusion: GCC policy makers should pursue appropriate incentive frameworks through reforms to the GCC’s business and investment environments besides the need to reconsider strategies for foreign direct investments to achieve economic diversification.