This research examines the human capital dimensions of structural change in oil economies, with a focus on the case of the Arab Gulf States: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia the United Arab Emirates (UAE). These oil-abundant, labor-deficient countries have undertaken numerous efforts over the past four decades to diversify their economies beyond oil, with varying levels of success. Oil-generated capital (rent) accumulation, however, has generated severe labor market distortions in the region, with private sector work dominated by majority foreign workforces and a high-wage public sector providing employment for the minority citizenry. The resulting human capital mix presents a structural barrier to developing the local capacity required for creating or sustaining a post-oil economy. Accordingly, this project examines the evolution of the Gulf labor markets in response to the region’s economic diversification efforts, from the first oil boom (1973-1986) through the second oil boom (1998-2008). The goal is to determine the conditions under which natural capital (oil) is converted to non-oil human capital (knowledge) or, conversely, the conditions under which oil abundance crowds out sustainable development capacity.
Utilizing a mixed-methods approach, this project consists of a four-decade analysis of historical and other secondary data analysis, a large-scale employment and human capital survey of foreign and local companies in the region, and key-informant interviews with human resource professionals in the UAE. Secondary data analysis identified a number of promising diversification efforts in the region, especially during the recent oil boom. Yet, these efforts have also stimulated demand for new forms of labor, knowledge and technology. In order to meet these demands, the region has deployed its oil wealth to attract foreign factors of production. Indeed, the Gulf States have sought to leverage their ability to access global human capital markets, learned through the experience of oil development, as a basis on which to construct a new competitive advantage. However, as a result, economic diversification has actually amplified the region’s labor and human capital distortions.
Survey and interview results indicate only a marginal change to the region’s overall hiring and employment incentive structures over the past four decades: foreign and local private sector companies remain unwilling/unable to hire and train Gulf citizens, while Gulf citizens remain unwilling/unable to take private sector employment. These patterns, however, vary significantly by region and economic sector. Overall, while strategies to attract foreign investment, trade and migration have succeeded, incentives for local knowledge transfer have not been operationalized. The result is a dual economy: first, a dynamic, market-based economy driven by expatriate labor and knowledge, with little local content; and, second, a distorted, oil-driven public sector which provides employment to the local population. Oil wealth has provided Gulf economies with the capital to create competitive new sources of economic growth, but the challenge remains sustainability: reproducing the labor force in non-oil industries locally.