REASSESSING THE CENTRALITY OF GOVERNMENT EXPENDITURE TO NON-HYDROCARBON ECONOMIC GROWTH IN THE GCC (1980-2021): AN EMPIRICAL SECTORAL ANALYSIS

Abstract

Political economy literature on the Gulf frequently asserts that the Gulf Cooperation Council (GCC) economies-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)-are heavily dependent on government spending. This assertion, often repeated in discussions on economic diversification, is seldom challenged. Yet, the claim that economic growth depends on government expenditure is highly contested among applied economists, including those researching the Gulf. This study critically assesses this dependency claim by integrating empirical economic methods with political economy theory to bridge a key interdisciplinary gap. Adopting a sectoral-level approach, this study examines short- and long-run relationships between government expenditure and growth in the primary non-hydrocarbon sectors-construction, finance, manufacturing, wholesale and retail trade, and transport and telecommunication-in the six GCC economies from 1980 to 2021. The study also compares government expenditure with two other key expenditures: household consumption and capital formation. The time series methods employed include the autoregressive distributed lag (ARDL) model, structural break adjustments, the bounds cointegration analysis, and the Granger causality test. The non-hydrocarbon sectors, collectively the dominant contributors to growth in the GCC since the early 1980s, are seldom examined at this level of detail. This study's findings reveal that government expenditure is the relatively least central expenditure to growth in the GCC's non-hydrocarbon economies, and it causes the most adverse long-run effects in several sectors, particularly in Kuwait and Oman. Capital formation, encompassing both public but mostly private investments, on the contrary, is the most central type of expenditure for most non-hydrocarbon sectors, although its long-run effects are not universally positive, particularly in Kuwait, Qatar, and the UAE. Household consumption, the largest expenditure and most reliable driver of demand but the least studied, is nearly as essential as capital formation, and its long-run effects are consistently positive. These policy-relevant findings imply that government spending may not be the most effective or efficient means of fostering sustained growth in some GCC sectors. For all primary non-hydrocarbon sectors, capital formation and household consumption are the relatively more effective drivers of long-run economic growth and, by extension, diversification within the GCC economies.