3.1 Introduction

Public expenditure appears as an obvious economic policy tool for raising the long-term economic growth prospects in the six member countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) of the Gulf Cooperation Council (GCC). Large external rents from public oil and gas exports have provided the governments of all six GCC countries with sizeable financial funds over the last decades. Among other things, these export earnings allowed for large public investments in the countries’ infrastructure (e.g. roads, electricity production, airports) and in the provisioning level of education and health services. Different models of economic growth ascribe a potential growth-enhancing impact to public expenditure categories which aim at raising the stock of public infrastructure, the educational level and the health status of local populations. Yet, the long-term link between economic growth and these categories of public expenditure exhibits substantial cross-country heterogeneity (chapter 2). Therefore, the following analysis explores the country-specific characteristics of the long-term link between public expenditure and non-oil economic growth in Bahrain, Oman and Qatar since the late 1970s.

Before turning to the long-term relationship between public expenditure and non-oil economic growth, a word is due on the importance of the oil and gas sector within the GCC economies. With a combined share at global proven crude oil and natural gas reserves of 29.9% and 20.3%, respectively, the GCC countries are prime examples for resource-rich countries (BP 2012). While the level of resource endowment varies between individual countries, the production of crude oil and, to a lesser extent, natural gas continues to play an important role in all GCC economies. This is particularly evident with regard to the trade balances and the fiscal accounts of the GCC states which are both dominated by oil and gas export revenues (tables 3.1 and 3.2).

In view of the long-term depletion of oil and gas reserves, however, a stronger importance of the non-oil economy has been a long held goal of economic policy in the GCC countries. Yet, increasing the long-run growth potential of non-oil economies appears as a complex economic policy task. Triggering broad-based non-oil economic growth depends on a very different set of economic conditions than launching the production of crude oil or natural gas.