Oil Dependence, Economic Diversification, and Economic Growth in GCC Countries: A New Composite Index and PMG-ARDL Evidence

Nermeen Ishker (), Hanadi Taher () and Maggie Houshaimi ()
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Nermeen Ishker: PhD Candidate in Economics, Beirut Arab University, Beirut, Lebanon,
Hanadi Taher: Beirut Arab University, Beirut, Lebanon.
Maggie Houshaimi: Beirut Arab University, Beirut, Lebanon.

International Journal of Energy Economics and Policy, 2026, vol. 16, issue 2, 230-241

Abstract: This paper constructs and applies a Composite Economic Diversification Index (CEDIX) to quantify the impact of economic diversification on economic growth in oil-dependent GCC economies during the period 2000-2022. In constructing CEDIX, the export, sectoral, and fiscal dimensions are combined by using principal component analysis. Estimation of the diversification-growth nexus was done through the PMG-ARDL specification. Furthermore, second-generation panel tests, the Pesaran CIPS unit-root test, and Westerlund's ECM cointegration test were implemented, and their results supported the long-run equilibrium of variables. Baseline controls are real Brent oil prices, investment, and labor. Results from the PMG estimation showed that diversification has a positive and statistically significant long-run effect on growth. The speed of adjustment to equilibrium is fast. As would be expected from reform gestation lags, the short-run effects of diversification remain modest, while investment and oil prices are the factors shaping the cyclical movements. A fixed-effects ECM estimated with Driscoll-Kraay standard errors was considered for robustness checking and also supports the sign and significance of our main findings. Therefore, policy should give priority to promoting non-oil exports, sectoral upgrading beyond hydrocarbon markets, and fiscal rebalancing in transforming oil windfalls into durable diversified growth.

Keywords: Economic diversification; Oil dependence; GCC; PMG?ARDL; Economic growth; Brent oil price (search for similar items in EconPapers)
Date: 2026
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DOI: 10.32479/ijeep.22501

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