Diversification, Oil Prices, and Economic Resilience: A Dynamic Panel Analysis of Gulf Economies

Abstract

This study investigates the role of economic diversification in shaping economic growth dynamics within oil-dependent Gulf Cooperation Council economies over the period 2000 to 2024. Recognizing the structural vulnerabilities associated with heavy reliance on hydrocarbon revenues, the analysis develops a Composite Economic Diversification Index that captures export, sectoral, and fiscal diversification dimensions. A dynamic panel framework is employed, incorporating second-generation unit root and cointegration techniques to address cross-sectional dependence and ensure robust inference. The empirical estimation is conducted using the pooled mean group autoregressive distributed lag approach, complemented by fixed effects error correction models with Driscoll–Kraay standard errors to validate robustness. The findings indicate that diversification plays a critical role in enhancing long-term economic performance by promoting structural balance and reducing exposure to external shocks. While the long-run contribution of diversification is substantial, short-run effects remain limited, reflecting transitional frictions and adjustment processes. Investment exhibits mixed effects, contributing positively in the short term but displaying inefficiencies over longer horizons. Labour force participation does not emerge as a key determinant of growth, suggesting that productivity and skill composition are more relevant than labour quantity. Oil prices continue to exert a significant influence on economic performance, underscoring the persistent dependence on resource revenues despite ongoing diversification efforts. The results provide important insights for policymakers seeking to balance resource-based revenues with long-term economic resilience.