Asymmetric Effects of Economic Diversification on GDP Growth Volatility in GCC Countries: Evidence from a Composite Diversification Index and a Panel NARDL Model

Abstract

This paper examines the asymmetric association between economic diversification and gross domestic product (GDP) growth volatility in the Gulf Cooperation Council (GCC) countries during the period 2000–2022. GDP growth volatility is measured using the rolling five-year standard deviation of real GDP growth. Economic diversification is measured using a Composite Economic Diversification Index (CEDIX), which is constructed through principal component analysis (PCA) and comprises export, fiscal revenue, and sectoral diversification. The index is rescaled to the unit interval and is decomposed into cumulative positive and negative partial sums in order to distinguish between diversification gains and diversification deteriorations. The empirical methodology includes cross-sectional dependence, panel unit-root and cointegration tests, and then the estimation of a pooled mean group nonlinear autoregressive distributed lag (PMG-NARDL) model. The results indicate a long-run relationship between growth volatility and its determinants, with significant long-run asymmetry between diversification gains and diversification deteriorations. Diversification gains are linked to lower volatility of GDP growth, whereas diversification deteriorations are linked to higher volatility. This suggests that deteriorations in diversification may be more strongly associated with macroeconomic instability than diversification gains are associated with stabilization. Short-run diversification effects are statistically insignificant, and the Wald test does not support short-run asymmetry. These results are consistent with the notion that diversification is more strongly associated with long-run resilience than with short-term stabilization.