Trade Liberalization and Economic Diversification: A Dynamic CGE Model for The Economy of Qatar

Abstract

This paper develops a dynamic computable general equilibrium (CGE) model for Qatar with the view of getting some insights into the working of this a small open oil dependent economy. The model addresses three important issues that will determine the future path of Qatar economy. First, the issue of the oil price and its impact on the economy. Second, the issue of economic diversification away from oil. Third, the issue of trade liberalization in view of WTO agreement, the custom union within the GCC block, the planned GCC bilateral free trade agreement (FTA) with the EU and the US and the Greater Arab FTA. The impact of oil is simulated by an increase in the world price of oil. Economic diversification is simulated by an introduction of a value added tax (VAT) that diversifies government revenue and makes it less dependent on oil. Trade liberalization is simulated by a reduction of the external import tariff. The model results indicate that the increase of the price of oil and trade liberalization lead to a substantial favorable outcome in term of both GDP and wealth. On the contrary, the introduction of the VAT has an adverse impact on both GDP and wealth. As the aim of the VAT is to make the governments less dependent on oil, it turns out that the VAT decreases the tax base as it leads to the shrinking of the economy and, overall, the government collects even less taxes. This paper is the first attempt of its kind to address these issues in a dynamic general equilibrium context for Qatar and the Arab Gulf region. In addition, the data collected to calibrate the model provides a consistent set of data for the Qatar economy that is not being developed before.