Beyond the Resource Curse: Investing in Oil States in the Gulf

At first glance, the “resource curse” appears to be both a logical yet totalizing theory. The idea that an abundance of natural resources can paradoxically stifle economic development, foster corruption, and exacerbate inequality has become a fixture of political economy discourse. But for investors eyeing the Middle East and North Africa (MENA) region – particularly the oil-rich monarchies of the Gulf – the resource curse is only part of the story.

To understand what role the resource curse plays for investors, we must first understand what the resource curse truly is. Broadly speaking, there are two types of assets within any state: liquid assets and fixed assets. A liquid asset, such as cash, bank deposits, or digital user data can be easily turned into other types of assets. A fixed asset, on the other hand, cannot easily be converted. The resource curse relies on the premise that the state will be attentive to the needs of liquid asset holders, who can withhold their assets from the state if they so desire, as compared to the needs of fixed asset holders. It follows that when states depend on liquid asset holders for investment and resources, they are more likely to accept limits on their predatory behavior. For example, late 16th- and early 18th-century England, the emergence of alternative markets for sheep farmers such as the Netherlands gave the taxpaying middle class more bargaining power against the monarchy, resulting in democratic reforms. Conversely, many studies have shown that democracy is less likely to emerge and survive in countries where oil production is central to the economy. In fact, scholars have coined the term “rentier state” for a country which derives all or a substantial portion of its revenue from the rent of indigenous natural resources to external clients.

The resource curse theory is typically used to describe the pervasive and negative effects of oil on democracy and private business. According to the U.S. Energy Information Administration, oil accounts for ~70% of Saudi Arabia’s government revenue and ~40% of GDP. Despite Vision 2030 reforms, the country’s non-oil sectors, like tourism and technology, are underdeveloped compared to oil and gas. The Saudi state's dominant role in the economy – through Aramco and a vast network of SOEs – crowds out private entrepreneurship and deters risk-taking. Through oil wealth, the Saudi monarchy sustains an authoritarian regime; by distributing rents via subsidies, public sector jobs and patronage, Saudi leadership reduces the need for taxation and thus limits the pressures for political representation. Kuwait, which is estimated to harbor around 6% of global oil reserves, has a comparatively strong parliament, but political life is dominated by disputes over the allocation of oil wealth. Over 90% of Kuwaiti nationals are employed in the public sector, funded by oil rents. This unsustainable model discourages productivity and entrepreneurial risk-taking in the private sector. Despite long-standing calls for reform, such as Kuwait Vision 2035, non-oil sectors have not meaningfully developed, leaving the economy vulnerable to oil price volatility.

While the resource curse theory provides a useful lens to describe the pervasive and negative effects of oil, the reality is more complex. While authoritarian regimes in the Gulf often exhibit symptoms associated with this framework – extreme wealth concentration, limited political freedom, and inhibited private sector innovation – opportunities for investment are not so dire. These regimes have also demonstrated remarkable fiscal resilience, strategic diversification efforts, and a capacity to attract foreign direct investment (FDI) in spite of their political structures. The United Arab Emirates, with around 6% of global oil reserves, has a diversified economy across the seven emirates, with Abu Dhabi and Dubai playing distinct roles. The nation adopted a strategy of early and aggressive diversification in the 1990s, recognizing that its oil reserves were modest and would decline. It pivoted towards service-based sectors, such as finance (Dubai International Financial Center), tourism (Burj Khalifa, luxury tourism), logistics (Jebel Ali Port, Emirates Airlines), and real estate. As of 2023, less than 1% of Dubai's GDP comes from oil, effectively insulating it from many symptoms associated with the resource curse. The UAE also created Free Zones with 100% foreign ownership, no income tax, and minimal regulation. Furthermore, the Abu Dhabi Investment Authority (ADIA), one of the world’s largest sovereign wealth funds, actively diversifies national wealth into global equities, real estate, and infrastructure, reducing vulnerability to oil price cycles and providing alternative avenues for domestic elites to grow their wealth besides owning fixed assets.

What does this mean for investors? On one hand, authoritarian states in the Gulf offer a form of “stability premium” that appeals to investors. According to the International Journal of Energy Economics and Policy, FDI inflows into the Gulf Cooperation Council have steadily increased over the past decade, particularly in non-oil sectors. However, investors cannot ignore the persistent structural weaknesses in Gulf economies. For example, the authors of Revisiting the Resource Curse in MENA Countries mention that despite their efforts to diversify and nationalize labor markets, the overreliance on expatriate labor in MENA countries creates long-term challenges. Moreover, authoritarian governance carries reputational risks for companies concerned with Environmental, Social, and Governance (ESG) metrics, especially as human rights issues could lead to pushback in Western markets. Lastly, wealth inequality and limited political freedoms can foster long-term instability, particularly if oil revenues decline and public welfare spending becomes unsustainable.

However, the resource curse is clearly not destiny. As the UAE demonstrates, leaders in oil-rich Gulf states can leverage their control over state resources and policy to engineer investor-friendly environments, and diversified economies. The crude application of the resource curse to the Gulf ignores the complex interplay of governance style, economic strategy, and global positioning unique to each of these countries. Long-term attractiveness for these economies will depend on their ability to successfully transition beyond oil, build a services-based private sector, and address social inequalities without triggering political unrest. For investors, the key takeaway is clear: authoritarian regimes in resource-rich states present both risks and rewards – but those fixated on the resource curse narrative may miss some of the most dynamic and investable opportunities in emerging markets today.

Christopher O’Connell (CC ‘28) is a rising sophomore studying philosophy, with a minor in German. He intends to complete the Special Program in Business Management at Columbia Business School. Within the Columbia Emerging Markets Society, Chris serves as Treasurer and a member of the Middle East North Africa division.

Aditya Jain (CC ‘26) is a managing editor for the Columbia Emerging Markets Review studying economics. He is interested in emerging markets, finance, and political economy.