Economic Diversification Potential in the Rentier States towards a Sustainable Development: A Theoretical Model

Abstract

This paper develops a theoretical model to analyze whether a rentier state can diversify its economy away from the rent revenue and hence sustain the economic development and preserve the status-quo. Considering the decarbonization process of the global economy and rapidly fall in economic value of hydrocarbons in the face of the supply glut, rentier states depending on oil and gas revenues urgently need to diversify their economies to avoid social backlash and political upheaval. There are three intertwining factors that determine an effective economic diversification away from the rent revenue: The profitability of non-rentier sectors, the size of the domestic economy to induce a “Big Push” for industrialization to non-rentier sectors, and the level of economic inclusivity. For an optimal level of economic diversification in a rentier state: (1) Non-rentier sectors should be attractive to private agents without the entry barriers; (2) domestic economy should be large enough to induce investment into non-rentier sectors; (3) the ruler(s) should have sufficient tolerance (inclusivity) for private agents investing into non-rentier sectors. Our findings indicate that a rentier state can achieve an optimal level of economic diversification provided that the conditions above are met even without any political change.

The Incentives and Efforts for Innovation and Entrepreneurship in a Resource-Based Economy: A Survey on Perspective of Qatari Residents

“…There are three critical factors playing in tandem that make the economic diversification and hence the preservation of the political status-quo more urgent than ever [23]. The elevated concern exists within the context of global-scale efforts towards decarbonization of the world energy system to mitigate the negative effects of climate change [24,25].…”

“…The societal and governmental capacity in pursuing these economic diversification initiatives are also investigated in depth by various scholars [47,48]. The limits of institutional capacity, as well as its potential future trajectory as a critical prelude to successful economic diversification, have been heavily studied in recent works by various scholars [7,20,23,35,49]. Harvard University's economic complexity index (ECI) measures the level of sophistication and knowledge embedded in the exports of a nation.…”

“…They are still not near the end spectrum of the economic complexity, such as Guinea, which has an extremely low economic complexity and knowledge-embeddedness in its exports [51]. It should be also noted that the GCC states have achieved some significant economic diversification, albeit temporal and local, regarding the sectors, regions, and countries [23,36,52]. This paper focuses on the determinants and core pillars of innovation in a country and the implications for a resource-rich country such as Qatar to contribute ongoing economic diversification efforts from a very critical point of innovation and entrepreneurship in Section 3.…”

“…The inclusivity of economic institutions and the governing rules play a critical role in fostering innovation through each of these three stages [85]. Basically, the protection of private property in all its forms, lack of corruption, free access to the markets, and ease of doing business for everyone are important rules in the realization of successful innovation [23,86,87]. In fact, the countries having inclusive economic institutions are leading in innovation and economic development compared to countries that have extractive or the opposite of inclusive economic institutions [58].…”

“…Countries leading in ease of doing business, lack of corruption, fairness in the legal system, and transparency in governing the economic affairs are usually democratic countries granting freedom of speech and critical media coverage [19]. It is still possible for non-democratic countries to instill inclusive economic institutions under certain conditions to boost the innovation and economic development of the country [23]. Countries such as Singapore, the UAE, and Qatar are implementing numerous business-friendly reforms and regulations to attract foreign capital and boost their economies, albeit the fact that they have absolute political systems [17].…”