Determinants of Economic Diversification and Policy Priorities for Qatar

In recent years, economic diversification became the foundation of the strategic planning of countries that are highly dependent on natural resources, these countries are in search of developing their economies to avoid dependence on fluctuating resource income that cause uncertainty in their economic and fiscal positions. For the policymakers of resource-rich countries, identifying success factors that are impactful in economic diversification would help them pursue a strategy towards sustainable long-term economic growth.

This study (i) empirically explores the factors driving economic diversification; (ii) investigates the impact of gross capital formation, which is often sourced by government investments, on economic diversification; (iii) reviews the successful economic diversification strategies pursued by some countries; and finally (iv) develops some action points for Qatar to develop a sustainable economic structure.

A panel regression analysis provided robust evidence supporting the importance of gross capital formation, foreign direct investment, ease of doing business, and labor force participation in determining the economic diversification performance of resource-rich countries. The connection between capital formation and economic diversification was studied via a panel vector autoregression. In addition to the findings from quantitative models, comparative research was used to explain similarities and differences across countries that were more successful in achieving higher status of economic diversification. Finally, the study proposes policy suggestions for Qatar around the critical factors of economic diversification.