When do petrostates diversify their exports? Urgency, interests, and policy design in Egypt, Kazakhstan, and Malaysia

Abstract Motivation The need to diversify their economies is an enduring challenge for fossil fuel‐dependent countries, one which will become ever more important as the world seeks to decarbonize. But the conditions under which major oil‐producing countries (petrostates) seek to diversify their exports—and those under which their attempts succeed—are poorly understood. Purpose This article tests competing explanations for the successes and failures of petrostates' export diversification. Methods and approach We employ a comparative case study approach using qualitative evidence from two comparatively successful diversification cases—Egypt and Malaysia—and one less successful case—Kazakhstan—selected using a Theil index of export concentration. Findings The evidence indicates that Egypt and Malaysia's more successful outcomes stemmed more from necessity and policy design than from differences in domestic institutions and interests. All three countries were motivated to diversify by price volatility and declining revenues at various points from the 1980s to the 2000s and beyond, but reserve depletion was a greater threat in Egypt and Malaysia. As such, they adopted a more balanced approached to diversification, one that combined liberalization with state intervention. Policy implications These cases suggest that petrostates may be willing and able to diversify as the global shift toward renewables raises the prospect of unburnable oil reserves. Petrostates can diversify efficiently by using a basket of policies that includes a mix of economic liberalization and government intervention to create investment and incentives in non‐oil tradeable sectors and nurture infant industries. Opposition to reforms in petrostates can be addressed by selectively compensating vested interests.