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Qatar economy without oil: can Qatar avoid the oil curse by economic diversification?
INTRODUCTION
The last couple of decades have seen rapid transformation of economic concepts towards the developments of innovation-driven
economies. Qatar has the third largest gas reserves in the world after Iran and Russia besides having significant reserves of crude oil.
Surprisingly, Qatar has the highest oil and gas wealth per capita in the world today (Daoud, 3). However, economic analysis shows
that at the current extraction rates, Qatar gas reserves can last for about 138 years while the oil reserves can last for about 36 years. Oil
production remains a critical part of Qatar’s economy. Qatar economy is majorly dependent on oil and gas revenue. The need to
intensify diversification of Qatar economy is therefore appropriate. While the energy sector clearly dominates Qatar’s economy, the
non-oil sector is currently experiencing dynamic growth. Liberalization of the economy is increasing foreign participation in both the
energy and non-energy sectors (Ibrahim & Harrigan, 21).
Following the International Monetary Fund staff report 2015 for Qatar, the country still plays a significant role in the global
natural oil gas market even as it strive to implement its diversification strategy. The report acknowledges the current steady national
economic growth but projects its deterioration in the near future. The report identifies the key areas of focus in diversifying Qatar
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economy as ensuring that the economy can thrive despite persistent low oil prices, risk reduction from public investments and
strengthening of financial sectors. More generally, reducing public investments by inviting and encouraging the involvement of the
private sector and foreign investments is a key step in economic diversification. Developing and implementing of financial policies
that encourage investment and development of non hydrocarbon sectors is as well crucial. The future economic outlook shows
persisting low oil prices and slow medium term global economic growth. Since Qatar economy is highly dependent on revenue from
its hydrocarbon resources, such economic prospects calls for intensification of its diversification process and efforts. Improving the
quality of higher education, labor market reforms and creating favorable business environment are key areas of economic
diversification to consider.
According to the General Secretariat for Development planning in Qatar, Diversification of Qatar economy is to ensure its
stability in face of global economic crisis and/or depletion of the natural reserves. In the context of Gulf Cooperation council,
economic diversification refers to the process of reducing dependency on oil by developing a non oil economy, non oil revenue
sources and non oil exports. By implication it also refers to the reduction of the role of the public sector in the economy by facilitating
the role of the private sector and foreign investments (Martin, 7). Qatar has a long term development plan known as Qatar National
Vision 20130 and a short term master plan, Qatar National Development Strategy 2011- 2016.Sound economic management,
responsible exploitation of oil and gas and suitable economic diversification forms the pillars of the two development goals.
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THE STUDY OBJECTIVES
The section presents the core areas of the research study, the problem of study and its justification. Qatar is implementing an
ambitious diversification program through a large public investment program. The risks of such large public investment program
include overheating the economy in the near term while creating overcapacity over the medium term (Martin, 11). The prospective
persistence in low oil prices and slow global economic growth are of great concern to Qatar since hydrocarbon resources forms the
baseline of its economy. The future prospective global economic outlooks therefore call for Qatar revitalization to intensify its
economic diversification strategies.
The great concerns are therefore whether the implementation of the diversification strategy is bearing any fruit. Are there
significant economic progress indicators to monitor and analyze the implementation of the diversification strategy? It is therefore clear
that in order to figure out the key areas for improvement and give a clear framework for the same, an in-depth research study and
Qatar economic analysis is paramount. The research study therefore aims to explore and asses the role of economic diversification in
Qatar economic growth. The research paper aims to analyze the diversification of Qatar economy and assess the total productivity
growth of Qatar economy.
Diversification is perhaps the most important challenge for the country currently. Some of the factors to consider when
planning economic diversification include labor distribution, human capital, public spending, privatization and productive
investments. The overall goal of diversification of Qatar economy is to reduce its dependence on oil and gas. The study therefore aims
to answer the question whether Qatar can avoid the oil curse by economic diversification. The study will give relevant
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recommendations for Qatar economic stakeholders to ensure the economy remains stable in the face of persistent low oil prices
(Living with cheap oil) and slow global economic growth rate. The empirical analysis of Qatar economy will also show the
performance of the diversification process and show the risks of public investment. The analysis tends to show the marginal returns of
such investments and give relevant recommendations for public investments. The study aims to give specific practical
recommendations to address the key issues of focus in Qatar economic diversification. The key issues include living with cheap oil,
reducing public investment risks and promoting selective financial credits in the financial sector to encourage non hydrocarbon
industry development. The study is therefore relevant and consistent to the current pertinent economic issues and can be extended to
any other economy looking forward to diversification especially those highly depending on hydrocarbon resources.
LITERATURE REVIEW
The section presents the works of different scholars and discusses their findings in relation to diversification of economies. The
section also presents selective analytical studies of Qatar economy. Several studies show different findings regarding diversification of
economies. The literature search shows that different Global Cooperation council counties are considering diversification of their
economies to ensure sustainability in their economic growth and development. Economic diversification is therefore a real issue of
concern especially to countries that are for a long time relying on a single natural resource for their GDP and economic growth.
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Ilham and Aham presents in their study whether United Arab Emirates can avoid the oil curse by embracing economic
diversification. The report shows that UAE suffer negative impacts from the oil boom of 2002 – 2008 and therefore in a dire need to
avoid the oil curse. The declining total factor productivity rate results from inefficient allocation of oil wealth capital, inappropriate
investments with negative marginal returns, unskilled labor force and poor pro cyclical fiscal policy. The study also find out that UAE
is currently not in a position to withstand the external risks of global financial crisis. The study therefore offers three relevant
recommendations for UAE to increase its financial security. Economic diversification with efficient allocation to non oil sectors,
increasing private investments and expanding exports to strategic partners are core to financial security (Ilham, 18).
Ibrahim and Harrigan give a chronological review of Qatar economy. The review gives a clear analysis of the past and present
economy of Qatar. The research shows that Qatar is changing directions and charting a new course towards balancing and
harmonizing economic, social, human and environmental outcomes given the exhaustible nature of its hydrocarbon resources. The
study also proposes further steps of transforming Qatar economy. The government of Qatar planning council in their Qatar knowledge
economy project presents their findings of assessing the possibility of turning Qatar into a competitive knowledge based economy
(Ibrahim et al, 22). The paper acknowledges that Qatar economy is highly dependent on oil and natural gas reserve and the country is
currently seeking to diversify its economy and directs its public and private investments into non energy sectors. The study also shows
that Qatar has plenty of economic resources and opportunities to develop a more diversified knowledge based economy which is less
dependent on energy resources and imported knowledge and skills. Qatar is poorly doing in education and innovation pillars. The
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report identifies the strengths and weaknesses of the four pillars of knowledge economy and presents the task to define concrete steps
to transform Qatar to a knowledge economy.
Richard Shediac and others conducts their study and concludes that Economic diversification is the road to Sustainable
development. The study shows that high economic concentration exposes economies to exogenous events such as fluctuations of oil
prices thereby creating economic volatility. The paper acknowledges that the GCC existent activities are highly sensitive to oil price
shocks. Levels of economic concentrations and diversification show a wide discrepancy from the G7, GCC and transformational
economies. The GCC economies are showing soaring economic concentration and inadequate diversification. Building a stable,
growing and sustainable economy is the goal of every nation. The findings of this analytic study show that there exists a strong
linkage of economic diversification to a sustainable economy. Economic diversification is the best tool to reduce the overall economic
volatility. The study provides a firm conclusion to global stakeholders that the secret of building a strong sustainable economy is by
building a diverse economy (Shediac et al, 15).
METHODOLOGY
The section presents the various methods the study employs to achieve its objectives. The study tends to critically and empirically
analyze the Total Factor productivity of Qatar and conduct a growth accounting on its economy. The study encourages the distribution
of Gross Domestic product (GDP) across different economic sectors. To assess the economic concentration and diversification of
Qatar economy, the study tends to evaluate the distribution of Qatar GDP across various economic sectors such as agriculture,
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manufacturing and tourism to determine the concentration ratio and diversification quotient. The study will compute the
decomposition of the aggregate GDP growth to determine the productivity of capital and labor then examine their efficient utilization
as a portion of the total output. By first assuming constant returns to scale, competitive markets and neutral technical progress, the neo
classical production function will be used to determine the productivity of inputs to total output growth (Ilham, 8). Appropriate
discussion of the results and trends will then follow. The following shows the production model and a growth rate estimation model
Y = A K α L (1−α) --------------------------------------------------- (1)
Y* = A* +α K* + (1−α) L------------------------------------ (2)
The neoclassical production model above in equation (1) defines Y as the rate of output. A represents the total factor productivity
growth rate (TFPG). The elasticity of output α equals the capital incomes share normally given by the ratio of K to L. The Y*, K*and
L*in equation (2) denote the growth rate of output, capital formation, and labor use, respectively. The analysis of the growth rates of
capital and labor considers their share of contributions to the total output as a measure of the total productivity.
For growth accounting, neo classical growth model still applies to assess the growth of Qatar economy over time. Several
variables such as inflation, investment rates, natural resource abundance, percentage change of terms of trade, accumulation of human
capital among others will be the predictors explaining economic growth. The study will employ the augmented Dickey-Fuller
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technique to show the maximum lags of economic growth. The ARIMA method will be useful to fit a time series model to interpret
the casualty of economic growth. The Durbin Watson test will follow at five percent significance levels to test autocorrelation
significant series of the models (Ilham, 10).
Various econometric methods are applicable. The Normalized- Hirschman index (NH) will be useful to accurately determine
the sector concentration in Qatar economy. The NH is a relative measure of economic diversity. The Scale values ranges from zero to
one in which a high value indicates a greater sector concentration. The model below shows the calculation of NH.
√∑ni p2 − √ 1
N
NH =
1 − √1/N
Where P is 𝑃 = 𝑥𝑖/ 𝑋, xi the value of exports of commodity I and 𝑋 =∑𝑁1 𝑋 𝑖
, and N is the number of products. The commodity i in the equation is petroleum since most of the GCC and hence Qatar nations
derive their wealth mostly from oil exportation. To support the reasoning behind the oil curse, The NH index will be very useful to
show if there is concentration in the oil sector to support the reasoning behind the oil curse.
The study uses determinants of diversification through a statistical model to determine the factors which contributes to the
economic diversification of Qatar while also impacting the NH index. The aim is to increase diversification by decreasing the NH
index which becomes the dependent variable in the model. Diversification is a function of different economic and non-economic
variables and the basic statistical model is as follows:
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NHt = α0 + α1 ExRatet + α2 GFCCt + α3 GDPCt + α4 Infl t + α5 Investt + α6 Tradet + εt
Where NH index is an index of diversification; GFCC is the gross fixed capital formation of GDP; GDPC is GDP per capita; Trade is
trade openness; Infl is inflation; and Invest is investment rate. ExRate is exchange rate; αi is the unknown effects to be estimated; and
the subscript t is the time index. The model aims to point out the level of significant contribution of every determinant of
diversification to the NH index. The variables that will show a negative effect are helpful in decreasing concentration while the
variables that will show positive effect will increase concentration and drag back diversification. All the relevant economic data for
Qatar in this study will are available in national and international economic archives. The data period will be from 1980 to 2014.
EXPECTED OUTPUT
The section gives the general overview of what the study expects to achieve. The section presents the significance of the results of the
methodology above to the objectives of the study. The study aims to get the total factor productivity of Qatar and determine whether
the investments of the GDP have significant marginal returns. The analysis will give clear diversification recommendations and point
out which public investments are viable and those not for Qatar economy diversification. The NH index will show the sector
concentration of the economy. The tool is useful in assessing and advising on diversification of the economy. The ARIMA model will
show the contribution of every economic variable to the overall growth. The various determinants of diversification will give
directions on which economic steps to take in order to reduce the NH index hence reducing sector concentration. The discussion of the
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results will give specific and relevant guide to diversification of Qatar economy. The study will therefore give clear guideline for
diversification of Qatar economy from its analysis and assessment.
CONCLUSION
The study is therefore relevant as political campaigns on diversification of GCC economies heightens. Qatar has the frameworks for
diversification without clear long term visions. The study will therefore give valuable recommendations for economic diversification
in Qatar. The study will take about two and a half years to complete. The first year will basically involve desk review, study
arrangements, preparation of tools and other preliminary requirements. The remaining time will see the data acquisition, processing
and report preparation for presentation. The support of the supervisor and all the relevant stakeholders are vital the success of the
study and are much appreciated in advance.
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Works Cited
Government of Qatar, Planning Council. Qatar Knowledge Economy Project Turning Qatar into a Competitive Knowledge- Based
Economy Knowledge Economy Assessment of Qatar. Qatar: Government of Qatar. 2007.
Ibrahim Ibrahim, Frank Harrigan. Qatar’s Economy: Past, Present and Future. Doha, Qatar: Qscience Connect. 2012.
Ilham Haouas, Almas Heshmati. Can the UAE Avoid the Oil Curse by Economic Diversification? Bonn, Germany: The Institute for
the Study of Labor (IZA). 2014
Martin Hvidt. Economic Diversification in GCC Countries: Past Record and Future Trends. University of Southern Denmark,
Denmark: Center for Contemporary Middle East Studies. 2013.
Daoud Ziad, Rory Fyfe, Ehsan Khoman, Hamda Al-Thani & Rim Mesraoua. Qatar Economic Insights. Doha, Qatar: QNB
publications. 2015.
Richard Shediac, Rabih Abouchakra, Chadi N. Moujaes, Mazen Ramsay Najjar. Economic Diversification, the Road to Sustainable
Development. USA. Booz & Company Inc. 2008