A new framework guiding petrostates from resource extraction toward economic diversification and complexity

This study examines the structural transformation of petrostates from resource dependence to knowledge-based economies, identifying a U-shaped relationship between natural resource wealth and economic complexity with four distinct phases. Development typically begins with extraction dominance, followed by diversification. In the subsequent phase, complexity accelerates, ultimately reaching sustainable complexity. Using Qatar as an illustrative example and employing annual data from 2000 to 2023, we estimate an Autoregressive Distributed Lag (ARDL) model to capture both the short-run and long-run dynamics of economic complexity. The results reveal that initial increases in income from resource rents tend to suppress complexity; however, beyond a certain threshold, targeted diversification efforts reverse this trend. Granger causality tests further uncover bidirectional relationships between economic complexity and key structural variables, including trade openness, education, and real GDP, highlighting the endogenous and dynamic role of innovation and diversification. Moreover, cross-country comparisons with other resource-rich economies corroborate the model’s generalizability, highlighting that the developmental outcomes of resource wealth critically depend on the institutionalization of knowledge and innovation to achieve better diversification. These findings offer an empirical and theoretical contribution to the literature on structural transformation in petrostates.