Governments in oil-dependent countries, particularly those in the Gulf, have launched broad and ambitious national plans to diversify their economies. While diversification reduces vulnerability to oil shocks, the expansion of renewables and the deregulation of domestic energy prices decrease domestic oil consumption, leading to higher oil exports and greater exposure to oil price volatility. We develop a simple Dutch disease model to demonstrate that immigration can mitigate this exposure by limiting the contraction of the non-energy tradable sector during windfall periods. This effect holds even when accounting for remittance outflows. To empirically validate our model’s predictions, we estimate a structural panel vector autoregressive model using data from GCC countries. Consistent with our theoretical results, energy windfalls act as a pull factor for immigration, which in turn raises manufacturing production in both the short and long run.
