Volatility, diversification and development in the Gulf Cooperation Council countries

This paper studies the evolution of volatility and its sources in the six Gulf Cooperation Council (GCC) countries from 1970 to the present. We break down volatility into three main components. The first component relates to the volatility caused by sector-specific shocks (e.g. shocks to the oil sector). The second component relates to aggregate country-specific shocks that affect all sectors in the economy (e.g. shocks due to policy or political instability). The third component relates to the covariance between country-specific and sector-specific shocks (e.g. the degree of pro- or counter-cyclicality of macroeconomic policy vis-à-vis sectoral shocks). We find that volatility has significantly declined in the past four decades, in part due to a higher degree of sectoral diversification in most GCC economies. There is, however, considerable scope for progress, which could stem, for example, from more countercyclical fiscal and monetary policies. Moreover, the global financial crisis has revealed financial-sector vulnerabilities in some GCC countries that need to be addressed in order to limit future economic disruptions.