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Oil Producing Countries Working to Diversify Their Economies


Record oil prices are providing key Middle Eastern oil producers with the financial means to diversify their economies in an effort to reduce their dependence on petroleum.

The oil booms of the late 1970s and early '80s left oil producing Middle Eastern countries awash in money. Billions of petrodollars were spent on unsustainable domestic projects, such as Saudi Arabia's massive spending on agriculture to become the world's sixth-largest producer of wheat. When oil prices collapsed, the government ran out of money and the project failed.

But the lessons of the past have not been lost on Riyadh or other members of the Gulf Cooperation Council, or G.C.C. Qatar, Bahrain, Oman, Kuwait and the United Arab Emirates, or U.A.E., also belong to the G.C.C. and, along with Saudi Arabia, possess 40 percent of the world's oil reserves.

Lessons of the Past

Mohsin Khan, Director of the Middle East and Central Asia Department at the International Monetary Fund, or I.M.F. in Washington, says these nations have curbed spending despite record oil revenues, projected to rise from $200 billion in the last two years to more than $350 billion for this year alone. He says, "They learned their lessons from the 1970s and '80s and are being much more cautious in terms of spending, much more cautious in terms of what they're predicting for oil prices. In other words, they're treating the oil price increase as temporary. They don't want to get trapped into large-scale, major government financed projects that, later on, if oil prices were to fall, would [leave them] with projects that are not economically viable."

In the 1970s and '80s, governments in oil producing Middle Eastern nations spent up to 80 percent of their oil revenues on unsustainable development projects. This year, G.C.C. governments drew up their budgets based on oil selling for $30 per barrel. With an eye toward the future, these nations now save two-thirds of their oil revenues and spend the rest to diversify their economies away from oil, according to the I.M.F.'s Mohsin Khan.

"There are two big changes," says Khan. "One is that they're not spending as much. And two, what are they doing with their savings? In the 1970s, they were basically saving it in the form of financial assets in banks in the United States or in Europe. Now they're diversifying quite a bit and a lot more of the money is staying in the region."

Where the Money Goes

So where is the money going? Many analysts say a new breed of investors from the region is on the lookout for investment opportunities abroad. At the same time, much of the money is being spent on education, tourism, training and new economic sectors meant to enhance privatization and create new jobs. Bahrain, for example, has developed into a major financial center that employs more Bahrainis than expatriates, who have a very strong presence in the Persian Gulf region.

But Marcus Noland, Senior Fellow at the Institute for International Economics in Washington says success has been mixed, depending on each country's strengths and resources. He says, "Some, such as Saudi Arabia, have emphasized diversifying downstream by producing petrochemicals, plastics and so on. And those industries are expanding. Other [oil] producers, such as some of the smaller states along the Gulf, like the U.A.E., have emphasized moving into services - - whether financial services or, in the case of Dubai, obviously transportation services and, to a certain degree, tourism."

Saudi Arabia has also opened up domestic trade and investment opportunities, which are expected to be worth more than $600 billion during the next few years. And the President of the National U.S.-Arab Chamber of Commerce in Washington, David Hamod says many of these projects are not in petrochemicals. He says, "You see U.S. companies like Cisco [Arial Unicode MS,Arial,Verdanas], Intel, I.B.M. and others now investing millions and millions of dollars in some of the biggest markets, like Saudi Arabia, where they see tremendous growth in the service sector. And as people begin to diversify their economies in the region, they recognize that services are an important part of the future."

Qatar, meanwhile, has used its oil revenues to expand its petrochemical industries and develop new avenues for training and educational opportunities for its people. In Oman, the government is overhauling the country's financial institutions and privatizing more of its economy.

More Jobs, Less Oil

But economist Herman Franssen of the Maryland-based consulting group, International Energy Associates, says that these countries will have to do more to lessen their dependence on oil and create new jobs.

"They will continue to invest heavily in the petroleum and gas sector," says Franssen. "But what they will have to do to follow that up is to further downstream in those sectors and diversify as Dubai has done successfully into regional services that are outside of the oil and gas sector. And tourism for a number of countries could be highly successful if they follow the kind of policies that Dubai has followed."

The Dubai Model

For years, Dubai, the second largest of the seven U.A.E. emirates, has been aggressively expanding into non-petroleum sectors, such as the media and communications, and attracting foreign investors. It is considered by most observers to be an example of successful diversification in the region.

But the I.M.F.'s Mohsin Khan says Dubai, which spans an area of less than 3,000 square kilometers, would have succeeded even it had no oil reserves. He says, "Dubai hasn't got that much oil. Yet it has managed to diversify in services enormously. They've become a services center, both in terms of I.T. [i.e., Information Technology] services for the region, tourist services. Now they're going into financial services and they have made themselves not only a tourist center for people in the region, but they [have also] made themselves a tourist center for Europe."

Some analysts argue that countries with larger petroleum reserves, like Kuwait and Saudi Arabia, have moved more slowly toward diversification than countries whose oil reserves are dwindling, like the U.A.E.

What the Future May Hold

But regardless of the lifespan of their oil resources, David Hamod of the National U.S.-Arab Chamber of Commerce says all of these countries understand how unstable the oil market can be.

Hamod says, "With the oil prices that we see today, the countries in the G.C.C. in particular, have a remarkable opportunity to set aside funding for greater diversification in a way that they really didn't have back in the 1970s when we saw a similar boom along these lines."

But as the lessons of the past sink in, most analysts warn that current diversification projects are not creating enough jobs for the region's growing population of young people. And some say that soaring oil prices will make it harder for governments to lure people away from lucrative jobs in the petroleum industry.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.

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