Obstacles to Innovation in Rentier Economies: States, Elites, and the Squandering of the Demographic Dividend

After the Arab Spring shook governments throughout the Middle East in the early 2010s, youth activism has increased with simmering tensions over corruption, obstacles to economic empowerment, and the deteriorating welfare state as states across the Gulf region witness their youth majorities evolve into a working-age population. This opportunity to capitalize on this age structure and increase economic productivity is an exigent matter of both political and economic stability in the Gulf rentier states along with the broader Middle East. With the wealth of the Gulf States based largely on hydrocarbon resources, these states share a unique economic situation, and often are termed “rentier economies.” The resulting institutional ecosystem is often extractive by design and undermines innovation at its core. Thus, the capacity of the state to attain a demographic dividend― a sweet spot in the age structure that can be the highest opportunity for economic productivity―will be limited for decades to come if not framed by the appropriate institutional design and policies that allow for innovation-led development. Theoretically, the dependency on hydrocarbons creates distinct interaction between the institutional environment of the economy and the political logic of stakeholders such as the business elite and the labor force. In this context, this dissertation’s question is: How does the institutional environment of state-business relations affect the necessary economic reform that fosters innovation needed for rentier economies to convert youth bulges into demographic dividends? This dissertation has three primary arguments. First, that rentier economies’ institutional characteristics and market dominance by elites can stifle innovation, which consequently undermines prospects of achieving the demographic dividend. Through a cross-national quantitative analysis, the results indicate that rentier economies generally have a negative relationship with innovation, but that institutional quality and design can drive successful innovation in these economies. Second, by applying a historical institutional approach, this study explains how rentier economies originated from particular socio-political antecedents and were influenced by various power brokers in the pre-oil era economies, impacting the institutional structure that undergirds the politics of economic reform. This historical arrangement spurred differing levels of business elite dominance in the economy and therefore caused variance in the level of state-led capitalism across the three states— Qatar, Kuwait, and Bahrain. In evaluating the histories of these three case studies, one main variable emerges that influenced different institutional development pathways—economic diversification. Diversification was a driving force behind the trajectory and influence of merchants on the private sector’s institutional development, and that elite roles have affected contemporary political obstacles for innovation-led economic development. Third, in the current context, the institutional arrangements of rentier states, the state with the highest level of centralized state-led capitalism and lowest level of business elite dominance is more empowered to realize the innovation-led economic development necessary to successfully attain the demographic dividend.Existing currents of thinking on the literature on the resource curse, rentier economies, and the demographic dividend have failed to highlight the connection between political forces and the economic policies that affect societies with youth bulges. A central goal of mixed-methods research is to illuminate this gap and to point to alternative strategies to make the most of an extraordinary moment of opportunity that may only arise once for decades to come.