Oman has sustained real GDP growth of about 9% per annum over the past 40 years.1 This
has been possible because of the oil sector boom and its multiplier effect on other sectors of
the economy, and because of government expenditure on education, health, services, and
infrastructure development. Dependency on oil income, however, threatens the ability of the
economy to sustain GDP growth when oil income runs low and when oil resources are
depleted. Initially, the paper examines the sources of growth in the Omani economy by estimating the Total Factor Productivity (TFP) of the Omani economy. This is very important
for several reasons. First, it reveals important information about the contributing factors to
GDP growth and how they have evolved throughout the past four decades of the oil era.
Second, it shows how efficient economic agents have been in using factor inputs. Third,
and most importantly, TFP analysis shows if GDP growth in Oman was a function of capital
and labor accumulation or whether it was also the result of the increasingly efficient use of
factors inputs and technological progress. We are interested in finding out how the TFP
contribution to GDP growth developed over the years. As will be discussed, a negative TFP
is not necessarily an indication of an increasingly inefficient use of factor inputs and lack of
technological progress. It could also reflect a major capital injection into the Omani economy
that was made possible by the discovery of oil, with delays in achieving full output from the
resulting capital stock. Notwithstanding these issues, a positive TFP development would
also be an indication of Oman’s ability to sustain GDP growth in the eventual exhaustion of
oil resources.
Several factors influence the long-term economic growth of an economy and its
sustainability, including its per capita income, geographic location, saving rates, institutions
and fiscal balance (Sachs and Warner, 1997). This paper will importantly assess the
implications of oil resources for development, fiscal policy and debt sustainability in Oman.
It seeks to provide additional insights into the discussion regarding oil dependency/
independency and how the government can sustain a viable expenditure policy when oil
income runs low.
In short, this paper aims to investigate the sources of growth in the Omani economy and
considers whether a negative TFP in an endowment economy with an initial low level of
development means inefficient use of factor inputs. The second aim is to use permanent
income hypothesis to consider various scenarios on sources of economic growth and optimal
plans for optimal government spending in preparation for the depleting oil reserves. Fiscal
policy options are of particular importance because of the continuous reliance on oil income
of other sectors in the economy, and because of the need to finance government expenditure,
despite the expected depletion of the proven oil reserves within the medium-term. As an
important contribution, policy implications of our findings will be applicable to other Gulf
countries to better manage their scarce natural resources and enhance economic
diversification.
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