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Advances in Social Sciences Research Journal – Vol.7, No.6

Publication Date: June 25, 2020

DOI:10.14738/assrj.76.8523.

Yahyi, N. A., Azalina, A., & Supin, K. (2020). The Influences of Economic Diversification and the mediating Effect of Industrial Development

on Economic Growth in Oman: A Conceptual Framework. Advances in Social Sciences Research Journal, 7(6) 626-632.

The Influences of Economic Diversification and the mediating Effect

of Industrial Development on Economic Growth in Oman: A

Conceptual Framework

Nasr Al Yahyai

Universiti Selangor, Selangor Business School,

Petaling Jaya, Selangor.

Aza Azalina

Universiti Selangor, Selangor Business School,

Petaling Jaya, Selangor.

Kamisah Supian

Universiti Selangor, Selangor Business School,

Petaling Jaya, Selangor.

ABSTRACT

Industry is at the heart of a government's plans to transform the

economy from a resource-based economy to a value-added one.

Economic diversification is vital to countries’ long-term economic

growth, but many resource-rich countries remain heavily reliant on

revenues generated by natural resources such as mineral or oil

production. In Oman, the fall in price oil compelled the government to

rethink about development and economic plans in order to improve the

living conditions of the population. The main objective of economic

diversification agenda is to increase the contribution of these sectors to

the gross national product (GDP) of Oman, raise production and create

more jobs for these sectors. New technologies will promote the

achievement of inclusive, sustainable industrial development through

its creation and absorption. New innovations allow businesses to bring

new products into the market and improve production efficiency. In

addition, industrial development generates new employment and profit

incentives. More products and productivity of production also add to the

growth of the economy. Industrial development at the same time leads

to the manufacture and diffusion of emerging technology. Only by

industrialization can economies, industries and businesses build and

maintain the requisite technical transition capabilities. This paper

presents a conceptual or research framework that identifies the

mediating effect of industrial development in the relationship between

economic diversification and economic growth in Oman. Two main

factors are considered, i.e., the strategic drivers consisting of economic

and non-economic variables, and industrial development initiatives.

The paper concludes with the discussion on the formulations of

hypothesis statements that describe the inter-relationships between

the constructs in the conceptual framework. It is expected that the

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Advances in Social Sciences Research Journal (ASSRJ) Vol.7, Issue 6, June-2020

proposed framework can be further verified and tested by using

empirical research work.

Keywords: Economic Diversification, Industrial Development, Economic

Growth.

INTRODUCTION

Economic diversification can be related to the theory of economic growth, trade, technological

change and structural transformation, and it is beneficial to provide job opportunities for each

country and to encourage structural change and economic development (Friere, 2017). Economic

diversification is characterized as a move towards a more diverse trade and domestic production

structure in order to increase productivity, create jobs and provide the basis for sustainable growth

in poverty reduction (Gill et al. 2014). More specifically, the diversification of domestic production

results from a shift in domestic production across sectors, industries and companies. This reflects

systemic transition dynamics as a productive diversification of domestic production includes the

re-allocation of capital from low productivity activities to those with higher productivity across

and/or within industries.

This paper offers a holistic view of cause-and-effect relationships among various drivers of

economic diversification that subsequently leads to economic growth. The aims of this paper are to

assess the theoretical underpinning of economic growth with the special focus on economic and

non-economic drivers of economic diversification, and industrial development as the mediating

factor, respectively.

This paper is about providing a definitive response to the call for an establishment of an integrated

economic diversification framework. The specific objectives of the study are as follows;

1. To incorporate the roles of industrial development as the mediating factor.

2. To establish the hypothesized relationships among the constructs that may significantly

exist in the proposed conceptual framework.

This paper is structured as follows; first, we review the previous works based on the literature and

highlight the existing arguments on causal relationships in the economic diversification framework.

Second, we formulate the conceptual model, which offers a holistic framework for future research.

Third, we formulate hypotheses statements associated with the inter-relationships that may exist

in the conceptual framework.

PROBLEM STATEMENT

Economic diversification is regarded as one of the key goals for achieving the vision for the Oman

economy, as part of a number of economic development plans in Oman. Oil is the major source of

income for the Oman’s economy and more than 80% of the country’s economy is from oil. In recent

years, due to decline in the oil prices has slowed down the economy and the Government is taking

several measures to improve its economy. Realising this critical issue, Oman has been taking the

necessary steps to adopt various diversification policies so as to reduce dependency on the oil

revenue and the country can be protected from the risk incurring due to the change in oil prices.

The government is now trying to increase the contribution of non-petroleum activities to GDP

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URL: http://dx.doi.org/10.14738/assrj.76.8523 628

Yahyi, N. A., Azalina, A., & Supin, K. (2020). The Influences of Economic Diversification and the mediating Effect of Industrial Development on Economic

Growth in Oman: A Conceptual Framework. Advances in Social Sciences Research Journal, 7(6) 626-632.

within its plan to diversify sources of the national income (Mubeen et al., 2017).

In order to reduce its over-reliance on oil and gas, Oman initiated a national programme for

enhancing economic diversification in 2016 (National Programme Tanfeedh, 2016), which is part of

the 9th Five-Year Development Plan (2016-2020). While Tanfeedh is not perceived as a new plan

or strategy; it is rather an accelerator that creates an easy business environment in the region. This

paves the way for increasing bureaucracy and a better understanding between the private and

government sectors and civil society. As previously stated, the Government has chosen five areas

with the best potential: manufacturing, transport and logistics, tourism, fishing and mining. The

results of the study provide useful information for the implementation of policies to improve

Oman's program of economic diversification. It also provides additional details on whether existing

policies need to be reorganized to facilitate a more favorable environment and sustainable

development in Oman (Al Waihabi, 2016).

It has been noted that Oman has been working hard to diversify his economy. The Vision 2020 for

the period 1996-2020 has strategic goals that include a variety of priority topics, including

manufacturing, tourism, infrastructure, services, etc., and development of human resources. The

2020 vision anticipates major structural change in the economy from 62.4% in 1991-1995 to 81%

in 2020, with a net rise in non-oil GDP. However, Oman faces serious challenges, because non-oil

GDP has declined steadily since 1995 to 52,9 per cent in 2010, instead of increasing its share. Given

this trend of diversification, the 81 percent target in 2020 is uncertain.

However, the lack of a concrete economic diversification approach that can be converted into an

action plan that has acceptable benchmarks and a tracking and assessment mechanism poses a

significant deficiency in vision 2020. The various development plans include a juxtaposition of

projects with little coherence and integration between them in the various socio-economic sectors.

The Vision does not clearly state what measures are required to provide the necessary conditions

for economic diversification to be achieved.

There is a need for re-assessment of the factors that inhibit the progress of the economic

diversification agenda from the economic and non-economic perspectives. While these two

perspectives are necessary for a better performance of the agenda, a new pushing factor such as

industrial development may speed up the rate of progress of this important agenda for Oman.

Ensuring the achievement of these two factors through a proper monitoring and control would lead

to a steady economic growth of the country.

In this paper, we review some of the economic and non-economic determinants of economic

diversification and the role of industrial development in spurring the growth of Oman’s economy

LITERATURE REVIEW

Drivers of Economic Diversification

The degree and rate of diversification in a country is influenced by a number of political, structural

and economic factors. When the economy relies heavily on oil revenue, the sustained long-term

growth in world oil prices is daunting. As oil prices fall, the associated decrease in public income

triggers public spending cuts that slow growth in the non-oil sector and thus affect diversification

(Kasem and Alawin, 2019).