Learning lessons from past: Economic diversification in times of cheap oil

The current low oil price has renewed calls for greater private sector growth and diversity in Qatar’s economy. In my series of articles for Gulf Times, I examine the question to what extent the banking sector has been successful in aiding the diversification of Qatar’s economy, but as a starting point to this assessment, it is worthwhile asking why economic diversification is a good thing?
Low oil prices are nothing new, and the Qatari government is acutely aware of a dependence on oil and its associated challenges, as exemplified by the painful experience in 1982-1986 when oil prices fell sharply. Qatar’s gross domestic product (GDP) contracted significantly, and it took over a decade to pull its GDP up to pre-oil shock (1981) levels.
This prompted the Qatari government to focus on a clear and ambitious strategy of economic diversification in order to limit the effects of oil fluctuations on its economy and alleviate the pressure of relying entirely on one sector.
The government has used its vast energy wealth to develop non-energy sectors, with a key part being the development of the financial sector. The financial sector acts as a channel through which liquidity is provided to the private and emerging businesses, and sectors that were barely on the horizon a decade ago, such as real estate and construction, have now become major drivers of growth and employment.
In addition, Qatar embarked on a process of liberalisation and privatisation of its economy as an integral part of its diversification programme towards decreasing the role of the state and expanding private interests.
Its privatisation programme included transferring of responsibility of the state-owned Qatar General Electricity & Water Corporation (Kahramaa) to an independent authority, and floating the controlling stakes of major state companies such as Industries Qatar, Ooredoo and Nakilat on the Qatar Exchange.
The success and benefits of economic diversification are well demonstrated in these times of low oil prices.
Despite plunging prices, Qatar’s economy has maintained a good growth rate, with inflation adjusted GDP growth for 2015 is expected to be 3.7% and the non-oil and gas sector set to record double digit expansion (mostly attributable to construction and services). We have not seen a contraction in the economy as we did in the 1980s, and this is largely due to the government wisely pursuing a vigorous policy of economic diversification and strengthening of the private sector.