"Why have Arab governments consistently failed to diversify their economies despite tall promises and grand plans? The answer has more to do with politics than economics": http://ow.ly/UkJcL
Although Arab governments have long recognized the need to shift away from an excessive dependence on hydrocarbons, they have had little success in doing so. Iraq, for example, set economic diversification as a core policy objective in one of its first five-year development plans in 1965—yet the country has only become more dependent on oil over time. In Qatar, Kuwait, and Saudi Arabia, too, diversification has been a central, yet largely unrealized, development goal since the 1970s. Even the United Arab Emirates’ economy, one of the most diversified in the Gulf, is highly dependent on oil exports.
The trouble is that in many Arab economies, good economic policies rarely constitute good politics, especially for ruling elites. This is because the structural changes demanded by economic diversification—specifically, the production of a greater number and variety of high-value goods—promise to empower business constituencies that, flush with new income, could potentially challenge the ruler. In Kuwait, for example, the rise of an independent merchant class could undercut the power of the monarchy. If rulers in the United Arab Emirates have accepted diversification, meanwhile, it is partly because the Emirati private sector poses little political threat, since it is overwhelmingly reliant on foreign labor.
For diversification to succeed, its political costs for elites must be offset: they need to know that they will gain more than they will lose from the reforms. Any serious discussion of economic diversification must therefore begin by recognizing that resource-dependent elites will have to be compensated for the losses they will risk.
But what happens to elites of countries that have passed their domestic peak in oil production, and where domestic use of oil is now matching and exceeding domestic production? Suddenly, the one financial resource that the entire country depended on--money from oil exports--has vanished. In the mean time, the country's population has quadrupled or more during the boom times to levels far above what could ever be sustained by domestic agriculture...