The New Chessboard of Gulf Industrial Policy: The Deep Logic and Future Challenges of Economic Transformation

At a time when major economies around the world are re-embracing industrial policy, the Gulf Cooperation Council (GCC) countries have once again become a unique laboratory for observing how this tool can reshape economic development paths. Unlike many countries that abandoned government intervention and turned to market fundamentalism in the 1980s, the Gulf states never truly set aside industrial policy. Anchored by five-year development plans and state-owned flagship enterprises, they converted oil revenues into infrastructure, industrial capacity, and public welfare, seeking to escape the grip of the "resource curse."

Today, as global supply chains are restructured, the energy transition accelerates, and geoeconomic fragmentation intensifies, the Gulf states' industrial policy is entering a new phase that is both more ambitious and more complex. They are no longer content with traditional fields such as petrochemical downstream and metal smelting, but are instead turning their gaze toward hydrogen energy, artificial intelligence, advanced manufacturing, and future cities. However, the advancement of this transformation is not without costs and risks.

Historical Legacy: The Long-Term Interaction Between Oil Rent and Industrialization

The starting point of Gulf industrial policy is the contradiction between resource rent distribution and economic diversification. As early as 1968, Bahrain took the lead in launching a five-year development plan and, in the same year, established Aluminium Bahrain, initiating a model of government-foreign capital cooperation in industrial development. Dubai, for its part, began with the construction of port areas and free zones in the 1970s, gradually embedding itself into global trade networks. In 1976, Saudi Arabia established SABIC, developing the petrochemical industry on the basis of low-cost raw materials; Abu Dhabi, Kuwait, and Qatar also extended downstream through state-owned oil companies. These early practices shared common features: government-led investment, prioritization of capital-intensive and energy-intensive sectors, and the use of state-owned enterprises as implementing entities.

However, this model also solidified the "rentier" characteristics of the economic structure. The private sector tended to favor short-return industries such as trade, real estate, and finance, while export-oriented manufacturing lacked endogenous momentum due to high risks and demanding requirements. The report points out that the concentration of revenues in national oil companies further suppressed the willingness of private investment to enter the industrial sector, forming an intensified version of the so-called "Dutch disease." By the mid-1980s, as oil prices fell, many industrial plans were forced to shrink, and the Gulf states' diversification process slowed for a time.

New Strategies: The Combination of State Capital and High-Tech Tracks

Entering the second decade of the 21st century, the Gulf states have picked up industrial policy once again, but this time their toolbox is richer. National vision documents (such as Saudi Vision 2030 and the UAE Centennial Plan) explicitly list industry, logistics, tourism, and digital technology as priority directions. Sovereign wealth funds (such as PIF, ADQ, and Mubadala) have become investment engines, massively acquiring global assets and introducing cutting-edge technologies, while simultaneously building "mega-projects" at home as venues for technology deployment. The report emphasizes that low-cost energy endowments remain the foundation for Gulf states to compete in new industries, but the real variable lies in how public investment is combined with high technology. Hydrogen, renewable energy, data centers, and advanced manufacturing are seen as the keys to solving the "post-oil era" problem. For example, Saudi Arabia and Qatar are using natural gas reserves to develop blue hydrogen while also deploying photovoltaics and energy storage. These areas require not only capital, but also institutional building, human capital, and innovation capacity—the latter being precisely the weak link of the Gulf states.

Inherent Risks: State Capture and Politicized Decision-Making

The deepening of industrial policy in the Gulf has also amplified its inherent risks. The report lists several key vulnerabilities: first, the risk of state capture, where state-owned enterprises or interest groups may hijack national policy and turn industrial support into rent-seeking tools; second, politicized decision-making, where economic efficiency may be squeezed out when industrial investment is viewed as a means to achieve political goals; third, global environmental uncertainty, including trade protectionism and the ambiguity of energy transition pathways, exposing long-term investment to unpredictable external shocks.

Moreover, the boundary between the public and private spheres in Gulf states remains blurred. The government is both regulator and major shareholder, lacking a clear distinction between "supporting an industry" and "supporting a specific company." This can lead to ineffective subsidies and indefinite bailouts, undermining productivity. The report recommends that governments set performance thresholds like venture investors: if companies continue to incur losses, they should decisively cut their losses rather than keep pouring in funds.

Policy Recommendations: Upgrading from "Participation" to "Governance"

To address these challenges, the report offers a series of constructive recommendations. First, industrial policy should support "industries" rather than "companies," enhancing the competitiveness of the entire economic ecosystem through improvements in education, infrastructure, and the business environment, rather than directly propping up specific enterprises. Second, for state-owned or state-controlled enterprises, rules-based performance targets should be set and exit mechanisms established to avoid capital being sunk. Third, the boundary between the public and private sectors must be clearly drawn, guiding private investment through partnerships and policy incentives rather than replacing the market. Fourth, Gulf states should strengthen regional cooperation and coordinate infrastructure investment in areas such as logistics and transportation to avoid redundant construction and foster complementary competition.

These recommendations point to a more fundamental shift: industrial policy should not be seen merely as "resource redistribution," but rather understood as "state capacity building." In a highly uncertain global economy, Gulf states need more refined screening mechanisms, stronger accountability systems, and more forward-looking coordination of international economic strategy.

Conclusion: The Gulf Experiment in a Changing Landscape

Gulf states are writing a new development narrative through industrial policy. They are trying to prove that resource-based economies can achieve leapfrog development through deliberate institutional design. However, the balance of success no longer depends solely on oil prices or the scale of capital, but on how the state manages economic power, how it balances short-term goals with long-term resilience, and how it finds its place between regional competition and global cooperation.This research report does not offer simple answers, but rather provides a necessary analytical framework for understanding the Gulf economic transformation. In the future, the fate of industrial policy in the Gulf will concern not only industrial output, but also the entire region's ability to shape its own role in a post-carbon, post-globalized world.

---

Source: Middle East Council on Global Affairs, *Gulf Industrial Policy in a Changing Global Economy*, October 2025. Original link