Public and Private Investment in the Hydrocarbon-Based Rentier Economies: A Case Study for the GCC Countries

Abstract

This study investigates the causal relationship between public and private investments from 1960 to 2015 in the GCC countries (i.e., Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) which are known as hydrocarbon-based rentier states striving significant policy changes to diversify their economies. This research shows that there exists a non-linear dependency on public and private investments, and thereby non-linear causality is conducted to extract accurate information behind the scene, beyond the linear causality. In this regard, Saudi Arabia and the United Arab Emirates performed superior to other GCC countries in terms of nonlinear causality that shows bidirectional causality between public and private investment. In addition, structural time breaks reveal that these countries should be still considered as the rentier economies away from economic diversification. In short, the findings provide quantitative evidence to support the claim that, first, oil-based rentier economies strongly rely upon public investment, and second, economic diversification is limited in these countries.