This study addresses the following research question: “Taking into account the major trends in oil extraction and depletion, economic diversification and development, and population growth, what policies should be adopted by oil-exporting countries in the Arabian Gulf region to sustain high living standards?” The countries of interest include Saudi Arabia, the United Arab Emirates (UAE), Oman, and Kuwait. Standards of living in these countries have generally risen during the last 35 or so years, even after real output per capita fell substantially in the mid-1980s. Public consumption has been very high by international standards and the countries have not been able to save and invest adequate amounts overseas. Economic diversification has often been limited in scope, in that the ‘new’ industries tend to be highly dependent on oil themselves. There is thus an urgent need for further reforms to achieve a broader-based economy and an increased role for the private sector. Greater emphasis will need to be placed on improving the technological knowledge and capabilities of Gulf citizens. In the 1970s, labour was imported primarily to meet the needs of rapidly developing domestic economies. After 1980, however, the importation of foreign labour became a self-feeding process that was not necessarily in the best long-term interest of the nationals. The governments have made numerous efforts to limit the number of foreign workers, but have not met with significant success, mainly because of the absence of a coherent strategy and a lack of consistent application of regulations. Both of these can be related to an underlying lack of political will. Gulf countries should apply regulations concerning the repatriation/rotation of foreign labour more consistently, and should pay foreign workers higher effective wages. Some of this increase should be saved and invested, to be paid as end-of-service ‘gratuities’ that would help foreign workers re-establish themselves upon returning to their own countries. For nationals, a coordinated strategy should be implemented to develop their skills and capabilities for employment in practical occupations, and to prepare them to be internationally competitive in the long run. Instead of giving every citizen a job in the public sector, it is preferable to provide a basic benefit (income supplement) that does not interfere with incentives to work in productive jobs in the private sector. Results from the simulation model demonstrate that no matter how big their oil reserves are, the countries will have to face severe deteriorations in wealth and living standards if historical trends continue into the long term. However, if appropriate adjustments are implemented early enough, some of the worst consequences can be avoided. Essentially, these adjustments work by reducing current consumption and increasing investment, thus allowing physical and human capital stocks, as well as the net stock of assets held overseas, to grow more rapidly. Results from the survey of opinions indicate an awareness of the serious problems that would ensue following the depletion of oil, and considerable willingness to contemplate a wide range of fundamental changes to sustain standards of living in the long term. Nevertheless, care will need to be exercised to ensure that any changes made will not infringe upon the basic right of all individuals.

This study addresses the following research question: “Taking into account the major trends in oil extraction and depletion, economic diversification and development, and population growth, what policies should be adopted by oil-exporting countries in the Arabian Gulf region to sustain high livin...