The Lack of Economic Diversification in the Middle East

In no other region is the economy less diverse than in the Middle East, where the oil and gas industry has emerged as the dominant industry in that region.  For those countries in the Middle East fortunate enough to sit atop vast reserves of oil and gas, this industry has brought great wealth to many people.  For those countries in the region not so blessed by geography, the result has been widespread poverty and economy decline, not to mention the impact that this lack of oil and gas resources has had on the political stability of many of the region’s non-oil-producing countries.   In turn, this lack of stability has hampered these countries’ ability to attract the investment needed to develop other sectors of their economies. 

In the region’s leading oil producing countries, the higher oil prices that were in place before 2014 left little incentive for these countries to diversify their economies and lessen their dependence upon oil and gas exports.  However, two years of much lower oil prices, coupled with other economic and political shocks, have led to a renewed effort to diversify the economies of some of the most important countries in the Middle East.

Due to the lack of economic diversification across most of the Middle East, the region’s economy has been battered by the sharp fall in oil prices over the past two years.  For example, it has been estimated that by the end of this year, the region’s oil exporting economies will have lost between $500 billion and $600 billion in export revenues due to this decline in the price of oil.   As a result, nearly all of the countries in the region have experienced major increases in their budget deficits during this period, forcing governments across the region to dramatically cut back on public spending. 

Moreover, the region’s oil producing countries are not only under threat from the fact that oil prices have fallen, but also from new sources of oil production in places such as North America and Sub-Saharan Africa.  Furthermore, demand for oil has proven to have been weaker than most Middle Eastern countries expected, due to sluggish global demand growth that has been the result of weaker economic growth in many of the world’s leading oil consuming countries.  All of these factors point to the need for the Middle East to take much greater steps towards diversifying the region’s economy away from its dependence upon the oil and gas industry.

While most countries in the Middle East have not done enough to diversify their economies, a few countries in the region have, or once had, relatively diverse economies.  For example, Turkey has what is easily the region’s most diverse economy, with large and successful manufacturing and service sectors that have helped to offset Turkey’s relative lack of exportable natural resources.  However, Turkey has also been fortunate to be located near to wealthier European markets, a location that has made Turkey an attractive location for manufactured exports to Europe. 

Another country that once had a very diversified economy with large manufacturing and service sectors was Iran, but international sanctions devastated the Iranian economy, leaving it dependent upon oil and gas exports that were also restricted.  Finally, Dubai’s decision to aggressively attract investment and market itself as the commercial center of the Middle East has paid dividends by allowing Dubai to have one of the most diversified economies in the region.  While Turkey and Dubai now have diversified economies, and Iran once did, few other countries in the region have been willing or able to emulate their success and this raises major questions surrounding the region’s economic future. 

For most countries in the Middle East, diversifying their economies is likely to prove to be a major struggle.  For example, the region’s political instability is certain to hold back foreign investment in the region, particularly in any sector outside of the oil and gas industry.  Moreover, internal investment will also suffer as a result of the fall in oil prices as governments will continue to impose new austerity measures on the region as long as oil prices remain low.  Another significant problem facing the region is the concern over the labor forces of many countries in the region, as productivity levels are below those of other regions and, in the region’s wealthier countries, few local people have experience holding jobs outside of the public sector.  Finally, the region’s economic diversification will face significant challenges from countries outside of the region, as it remains far less expensive to produce goods for the Middle East in China or other emerging markets than in the Middle East itself, and this will further reduce the region’s ability to attract the investment needed to diversify its economy. 

Altogether, while the challenges to diversify the region’s economy are great, the threat to the region’s stability posed by slower economic growth means that the countries of the Middle East have no choice but to take every necessary step to diversify their economies.  Without this diversification, the economic and political future of the region is in serious jeopardy.