The Viability of Arab Gulf Industrial Development: The Relative Importance of Linkages versus Size Effects

The purpose of this paper is to examine one aspect of the role played by government expenditures in the Gulf States, the impact of government expenditures on the development of a diversified industrial base. Based on a factor analysis of the structure of the twenty-one Arab economies, it appears that until quite recently the oils and non-oil economies experienced fundamentally different patterns of industrial diversification. In largo part, industrial diversification was retard in the oil economies through the dominance of negative linkage effects associated with rapidly expanding government expenditures. Apparently these expenditures had their greatest impact on the service, distribution, and construction sectors, with relatively little direct stimulus to industry. At the same time these economies were not capable of achieving spread effects sufficient to offset the forces initiated by an expanding public sector. Those countries (The UAE and Qatar) that were able to make significant gains in industrial diversification appear to have done se through developing positive spread effects at key points in time (Qatar mid 1970s and the UAE mid 1980s), while avoiding negative linkage effects at others (Qatar early 1980s, UAE mid 1970s).