Economic Research Forum (ERF)

From rentier states to innovation economies: is a MENA transition possible?

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The combination of climate change, energy price volatility, high unemployment among educated youth, and global technological competition is exposing the vulnerabilities of MENA’s traditional economic structures and the need for structural transformation. This column examines whether such a transition is feasible and the policies that could promote such a shift.

In a nutshell

Many MENA countries stand at a historic crossroads: they can continue to rely on a volatile and diminishing source of natural resource revenues – or they can boldly embrace a future grounded in creativity, entrepreneurship and resilience.

The window for transformation is open: by investing in innovation, empowering youth and reforming governance structures, MENA countries can redefine their global position and build inclusive and sustainable societies.

Some MENA countries have initiated efforts to break free from the rentier paradigm – but moving to an innovation economy is not only a technological transition: it requires deep institutional, cultural and political reforms.

For decades, many countries in the Middle East and North Africa (MENA) have relied on a rentier economic model, primarily driven by the export of natural resources such as oil and gas. In this paradigm, the state secures substantial revenues from external rents rather than domestic productive activity, reducing the incentives for economic diversification and public accountability. While this has supported short-term growth, it is unsustainable in the face of long-term development challenges.

Today, the need to shift towards innovation-driven economies is not merely an option but an existential necessity. Climate change, price volatility in global energy markets, high unemployment among educated youth, and global technological competition are all exposing the vulnerabilities of MENA’s traditional economic structures. The key question is whether such a deep structural transition is feasible.

Understanding the rentier model in MENA

Rentier states are characterised by the concentration of external income in the hands of the state, which then redistributes it to society through subsidies, public employment and social benefits. This model creates an unproductive economic cycle with several long-standing consequences:

  • Chronic dependence on oil and gas revenues.
  • Weak incentives for private sector development and innovation.
  • Limited pressure for democratic accountability due to the absence of broad-based taxation.
  • Over-centralised bureaucracies with low productivity.
  • Suppression of entrepreneurial culture and risk-taking behaviour.

Why the shift is urgent

Several trends are converging to make the rentier model untenable:

The decline of the oil era: Global transitions towards renewable energy, decarbonisation policies in the European Union and the declining long-term demand for fossil fuels threaten the sustainability of oil-dependent economies.

Demographic pressure and youth unemployment: With over half the population under 30 in many MENA countries, unemployment among educated youth is alarmingly high. The public sector can no longer absorb the growing labour force, making innovation-driven job creation critical.

Rising global competition: Rapid advances in artificial intelligence, green technologies and digital economies have widened the innovation gap between MENA and leading global regions. Falling behind means missing out on future economic gains.

Political and social fragility: Non-diversified economies tend to suffer from inefficiencies, corruption and social inequality, which fuel discontent and instability.

Emerging regional experiences

Some MENA countries have already initiated efforts to break free from the rentier paradigm:

Iran: Despite geopolitical challenges, Iran has witnessed notable growth in its science and technology ecosystem, particularly in the area of knowledge-based firms and incubators. But structural governance issues and sanctions continue to impede its full potential.

Saudi Arabia: Under Vision 2030, the Kingdom has embarked on projects like NEOM (a new city), reforms in education and large-scale investments in artificial intelligence and renewable energy.

The United Arab Emirates: The UAE has made significant investments in knowledge infrastructure by building technology parks, hosting international universities (for example, NYU Abu Dhabi), supporting start-ups and promoting smart governance.

Structural barriers to transformation

Moving from rentier capitalism to an innovation economy is not only a technological transition: it requires deep institutional, cultural and political reforms. Key obstacles include:

  • Entrenched elites who benefit from the status quo.
  • Weak legal frameworks for intellectual property rights and innovation contracts.
  • Lack of coordination between academia, government and industry.
  • A brain drain and limited incentives for local talent retention.
  • High investment risks due to economic and policy instability.

Policy priorities for enabling the shift

To enable a successful transformation, MENA countries must adopt a comprehensive and coherent policy framework. This should include:

  • Developing a national innovation strategy that reflects broad-based social consensus.
  • Creating bridging institutions to foster collaboration among universities, the private sector and government bodies.
  • Investing in education for digital and entrepreneurial skills rather than traditional rote learning.
  • Reforming energy and subsidy policies to redirect funds towards R&D (research and development) and technology infrastructure.
  • Attracting and retaining top talent by offering social, financial and research incentives.
  • Strengthening regional scientific diplomacy and fostering cross-border collaboration and joint ventures in innovation.

Conclusion: a narrow but crucial window of opportunity

The path from rentier states to innovation economies is steep and complex – but not impossible. MENA countries now stand at a historic crossroads. They can either continue relying on a volatile and diminishing source of revenues or boldly embrace a future grounded in creativity, entrepreneurship and resilience.

The greatest risk is not economic volatility or geopolitical uncertainty: it is inaction. The window for transformation is open, but it will not stay that way forever. By investing in innovation, empowering youth and reforming governance structures, MENA countries can redefine their global position and build inclusive and sustainable societies.

This is not merely a question of economics: it is a question of national survival, dignity and legacy. The time to act is now.

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  • Kamran Yeganegi
    Kamran Yeganegi
    Assistant Professor, Department of Industrial Engineering, Islamic Azad University

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