Saudi Arabian Economic Development

Thesis statement

Saudi Arabia economy is built up based on oil with strong government control over major economic activities. The economy is centrally planned with some private companies which are controlled by the government. Before the discovery of oil in the Kingdom, the economy was built upon nomadic production, sea trade, and pastoral agriculture. The discovery of oil in 1948 was made the Kingdom to entirely depend on oil as a major economic earner. The oil wealth has enhanced the kingdom’s rapid economic growth. She has the largest oil reserves and the largest oil producer in the world. The oil revenues account nearly 75% of the countries total revenues.

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The economic planning of the Saudi Kingdom is directly connected to Saudi Kingdom resources. The four development stages of economic planning of the Kingdom were overall depended on the oil resource. The phase of the Kingdom’s development plans depended entirely on the oil revenues. The proceeds from the oil revenues were used in the expansion of social and economic infrastructure in the Kingdom. The reduced oil revenues limited the Kingdom’s capital to continue with its development plans in the second development stage. The country had to borrow from the international market to meets its agenda. Rapid rise in migrant labor made the Kingdom to rethink its labor resource strategies in the third stage. She thought through its labor requirements of planned development and introduced more programs to replace migrant workers with local labor. She also intensified education and training programs for local citizens. The fourth development stage was marked by an economic vision based on the private sector.

The Saudi Kingdom’s economy is heavily depended upon oil. The Kingdom is well aware that exporting oil in crude form, to some point of depletion, would cause catastrophic effects in the future. For this reason, the Kingdom had to embrace industrialization that aims at long term objective of diversifying the countries economic base. In the first boom economic cycle, the Kingdom managed to complete to major cities of Yanbu and Jubail. The construction of the two cities will enhance the Kingdoms industrialization. The two sites will have petrochemical facilities, refineries, small scale industrial plants, and permanent housing. The Saudi economic cities were central to the Kingdoms diversification strategy. The cities were expected to provide economic stability and at the same time offer private investors with investment opportunities. The main role of the private sector in the Saudi economy is to develop labor resource through education and training programs, and also provide intensive industrial capital to the Kingdoms economy.

The History of Saudi Economy

The Economy before the Oil Export

Saudi Arabia kingdom was created in 1932 and at that time, the economic state was not different to what it had been. The Kingdom’s economy was based on nomadic production and trade transport by use of camels was mostly used (Mallakh, 7). Seaports and sea trade with India and other countries led to the availability of large merchant enterprises of the time on the Eastern and Western shores of Saudi Arabia. The main source of livelihood for the people of Saudi Arabia before the development of the oil industry was pastoral agriculture and trade. The Kingdoms interior inhabitants were pastoralists raising goats, sheep, and camels. Settled agriculture was present in Asir and in the oasis areas of al-Hasa. The people living in small towns mainly engaged in commercial and artisanal activities. There were no industries by then. The general traditional economy was based on a complex of small, self sufficient units. The largest boundaries were those of oases, village and tribe. The social characteristics accompanying this kind of economic life were those of relative poverty, high level of illiteracy, and substantial isolation from development outside of local area. However, in some areas of the Kingdom, sufficient wealth was accumulated particularly on the gulf coast where merchants spread across Saudi territories to trade in pearl, fisheries, shipment of Arabia horses to India, trade in agricultural produce, and many others. Additionally, the Hizaz had the most significant commercial infrastructure based on services provided to the pilgrimage traffic. Earnings from this source provided a significant source of income to the holy cities of Mecca and Madinah and the nearby port of Jeddah. The people mainly engaged in supplying goods, accommodation and other support to the pilgrims. Levies on pilgrimage traffic also made up a major source of income for the Kingdom before the development of the oil industry.

Economy from Oil Export

The beginning of oil exports in 1948 marked the turning point of the Kingdom’s economy. Commercial oil was discovered in 1938, but World War II caused the delay in the production and export. Oil exports substantially increased the Kingdoms revenues. The revenues rose from $13 million to $16 million annually in the period 1938 to 1946 to $53 million in 1948. By 1953, the earnings had surpassed $100 million and by 1960 it stood at $333 million. The kingdoms economy then became dominated by the oil industry (Niblock, 35).

Saudi Arabia has an oil based economy with strong government control over major economic activities. The Kingdom controls 25% of the world’s oil reserves, the largest exporter of petroleum, and plays a key role in Oil Petroleum Exporting Countries (OPEC) organization. The economy of Saudi Arabia is centrally planned with some private companies controlled by the government.

The petroleum industry accounts for 45% of the Kingdom’s budget revenues, 45% of Gross Domestic Products, and 90% of export earnings. 40% of the Kingdoms Gross Domestic Products comes from the private sector. The government is encouraging the growth of the private sector to reduce the Kingdoms overdependence on oil and increase employment opportunities for increasing Saudi population. The government has allowed foreign investors and private sector in power generation and telecom sectors (Niblock, 36).

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The Oil Industry

Oil was discovered in the Saudi Kingdom by United States geologist in the 1930s. Large scale production commenced after World War II. Since then, oil wealth has made possible the Kingdoms rapid economic development, which started in earnest in the 1960s and enhanced in 1970s transforming the Kingdom. Saudi Arabia has the largest oil reserves in the world. She is the largest oil producer and exporter. Oil accounts for nearly 75% of the Kingdom’s revenues (Niblock, 36).

Saudi Arabia’s proven oil reserves amount 260 billion barrels. More than 95% of the countries oil is produced on behalf of the government by a state parastatal called Saudi Aramco. In june 1993, Saudi Aramco absorbed the state marketing and refining company (SAMAREC) thereby becoming the world’s largest fully integrated oil company. Most of the Kingdoms oil exports move by tankers from Gulf terminals at Ras Tanura and Jurayma. The remaining oil exports are transported through the pipeline across the Kingdom to the Red Sea port of Yanbu. The rise in petroleum revenues in 1974 following the Arabs and Israel war, made Saudi Arabia to become one of the fastest growing economies in the world. It enjoyed substantial surplus in its overall trade with other nations, imports increased hence enhancing government revenues for development, defense, and aid other Arab and Islamic countries (Mallakh, 15).

The Development Stages of the Saudi Economy

Between 1962-1970

This was the critical economic period for Saudi Arabia economy. It is the period when the basis for economic development was being laid down. The kingdom created planning organizations. It undertook investments that were directed towards a significant expansion of the social and economic infrastructure. The economy was eventually put on a solid basis after the late 1950s. The level of oil production during this period remained limited at least relative to the situation after 1972 (Niblock, 26).

1970-1985 Period

The Saudi Kingdom passed through its first three development plans during this period. The first development plan was implemented in the period 1970 to 1975; second development plan was implemented in the period 1975 to 1980, and finally the third phase in the period 1980 to 1985. At this stage of development, the Saudi economy underwent several changes during this period caused by the rise of oil prices. The sharp rise in prices in 1979-4 led to high revenue by the Saudi Kingdom than ever before. This was again replicated by another rise in 1979 to 1981. However, a significant fall in prices of oil in 1982 earned the Kingdom low revenues. The period was also characterized by economic policies which envisaged social and economic transformation of Saudi Arabia (Niblock, 27).

1985-2000 Period

This economic period outlined three development plans; the fourth development plan (1985-90), the fifth development plan (1990-95), and the sixth development plan (1995-2000). Over these years, the Kingdoms vision for a transformed economy was still on but the authorities had to take more. Most of the major infrastructural projects envisaged the Kingdom envisaged in the period 1970-80 plans were completed or being completed. The fall in prices of oil in the 1980s and fluctuating prices through the 1990s made the Saudi authorities to borrow in the international market. The dwindling earnings due to fall in prices meant that the Kingdom to have limited capital to continue with its development plan. Therefore, Kingdom had to borrow in the international market in order to complete its development plans. This development stage saw rapid rise in migrant labor in the Kingdom. This made the Saudi authorities to think through the labor requirements of planed developments and introduce more programs to replace non- Saudi labor with Saudis as well as intensify the education and training programs which will enhance utilization of Saudi labor. The Kingdom concentrated much of its focus on of economic policy over this period on coping with changing conditions (Niblock, 29).

Period from 2000-Present

This period commences with the introduction of the seventh development plan in the period 2000-04 and continues with the first years of the eighth development plans in the period 2005-09. This period has been marked with a new vision of an economy shaped around a dynamic private sector able to compete in the global markets. Low oil prices in 1997 and 1998 required the government to cut its expenditure and the Kingdom’s hopes for economic growth therefore depended on the private sector. By the year 2003, the oil prices and production were considerably stronger and the Kingdom’s oil reserves were as high as in 1981. In the 2005 to 2006, the government limited its economic reform agenda to a strategy of using the private capital to create a new industrial infrastructure foe the Saudi Kingdom. The period since the year 2003 is seen as constituting the second Saudi oil boom(Niblock, 30).

Non-Government Investments

The Role of the Private Sector

The Saudi Kingdom gives the development of labor resources the highest priority. The education at all levels, that is, at the primary, intermediate, secondary, and University levels are directed towards meeting the needs of society. To enhance this initiate, the Kingdom encourages the private sector to invest in training programs. Most importantly, the private sector is fully involved in the diversification of the Saudi economy to reduce the Kingdoms overdependence on oil production and export.

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Foreign Investments

Saudi Arabia is putting more emphasis on diversification and industrialization of its economy. Intensive industrialization requires huge capital in terms of technology and expertise and therefore the need for foreign investment. The overall key objective aimed by the Saudi Kingdom is to transform its current economy which highly depends on crude oil into a diversified industrial economy. This due to the realities that oil may be depleted in the future (El Sheikh, 27).

Saudi Arabia has launched five year successive plans since 1974 which have overseen infrastructural development to prepare its free economy to industrialization. The Kingdom achieved this objective through the formation of hydrocarbon based Petrochemical industry. These industry schemes and others have enabled the Kingdom to attract foreign companies on whose technology and expertise the implementation is depended upon. In 2002, the Saudi cabinet approved the long awaited foreign capital legislation to replace the old investment law (p.22). A general committee for investment to oversee all investments was also approved by the cabinet at the same time. The main objective of this law was to encourage, attract, and eliminate pitfalls that discourage foreign investment in order to diversify the country’s economic activities. The new investment law articulated new liberal policies which changed traditional patterns of joint venture to allow complete foreign ownership of investment projects (Niblock , 22).

Economic Planning

Diversification Plan

Saudi Kingdom is well aware that exportation of its oil wealth in crude form, to the point of deletion, would lead to dire effects in the not far future. If that happens, the Kingdom would find itself with no economic basis to depend upon. In reality to this fact, the Kingdom has embraced an industrialization strategy that targets the long term objective of diversifying its industrial base. This will enable her register greater heights of economic self sufficiency that allows it to gain the benefits of local production. The kingdom embarked on a long term drive of industrialization since the transfer of technology is time consuming. To realize this, the Kingdoms education policies have been to train as many Saudi citizens as quickly as possible. By the opening of the 1980s, many citizens of Saudi Arabia are in the United States of America Universities undergoing specialized training. About 20% of the total population is enrolled in some form of education within the Kingdom. Out of this percentage, about 1.24 million citizens are enrolled full time, 44,000 of these students were attending Universities, intermediate colleges, and post graduate institutions. The Kingdom projected a figure of for the end of the third plan period (1985) was 65,000 students in higher education with 10,090 graduates. Putting into consideration the Kingdoms population of about seven million, the enrolment and education statistics carry significant importance for the coming years and for development process.

In the 1970s, Saudi Arabia’s first two development plans put more emphasis on infrastructure. The outcome registered was quite impressive. For instance, the country’s total lengths of paved highways were tripled, the power generation was enhanced 28 times, and the capacities of her seaports were enhanced tenfold. The third development plan of 1980-85 changed the Kingdom’s emphasis. A decline in infrastructure spending was realized while expenditure on education, healthcare, and social services increased markedly. The diversification process and productive sector expansion did not rise as planned. However, the Kingdom successfully completed two industrial cities of Yanbu and Jubail that were built around the Kingdoms first cycle of oil boom (Mallakh, 7). The two cities were built around the use of the country’s oil and gas in the production of steel, petrol chemicals, fertilizer, and refined oil products. The Kingdom’s basic infrastructure was viewed as complete in the fourth development plan of 1985-90. However, education and training plans had not been fully realized. The Kingdom therefore encouraged private enterprise and foreign investment in form of joint ventures with Saudis public and public companies. The private sector became more significant during this period, rising to 70% of non-oil gross domestic product (GDP) by 1987. Thus, the economy concentrated more on trade and commerce, private investment in industry, agriculture, banking, and construction industry. The increased private investment received much government support and incentive programs. The purpose for this initiative was intended for the private sector to achieve between 70-80% ownership in most joint ventures. The fifth development plan for the period 1990-1995 put more emphasis on the consolidation of the Kingdom’s defenses, improved and efficient government social services, regional development, and creating greater private sector employment opportunities for Saudi citizens by restricting the number of foreign workers. The sixth development plan for the period 1996-2000 dwelt on reducing the cost of government services without cutting them and expanding educational and training programs. The plan was keen in Kingdoms dependence on petroleum sector by diversifying economic activities specifically in the private sector with special concentration on industry and agriculture. Lastly, the seventh plan decimated for the periods 2000-2004 focused on economic diversification and the greater role of the private sector in the Saudi economy.

Economic Cities

The Saudi economic cities are central to the Kingdoms diversification planning. The Kingdom has planned and started constructing metropolitan marvels at a cost of more than $60 billion. The projects are expected to significantly change the economic stability of Saudi Arabia while providing a wealth of Greenfield opportunities to private investors. The four cities the Kingdom planned and has started constructing are; King Abdullah Economic City (KAEC) located in Rabigh, Prince Abdul-Aziz Masaed Economic City (PABMEC) situated in Hail region, Knowledge Economic City (KEC) located in Madina, and Jazan Economic City (JEC) located in Jazan. The main objective of the Saudi Kingdom establishing these economic cities are; to promote balanced regional development, achieve economic diversification, create better job opportunities for Saudi citizens, and upgrade the country’s economic competitiveness.

The main vision for the economic cities is intended to contribute more than $150 billion in Gross Domestic Products (GDP), create over one million jobs, and become home to four to five million residents by the year 2020. To serve a wide range of needs of these residents will require immense involvement of the private sector to fully utilize its potential that is, commercial and industrial openings will offer even greater investment opportunities. The cities are intended to be built on specifically selected Greenfield sites and strategically located around the Kingdom to utilize regional strengths. The cities will exhibit modern building designs and will use the most advanced digital technology, world class services, and advanced infrastructure. These combined advantages coupled with attractive investment incentives and supportive regulatory environment, will enhance competitive advantages to investments operating in the cities. In addition to industrial dimension, the design strategy of these cities put into consideration central factors such as; education, healthcare, entertainment, and others to enhance the quality of life. The Saudi Kingdom authorities are working with environmental institutions to ensure that with environmental compliance in mind. The intention of the Kingdom is for the cities to be global leaders in environmental matters by using leadership in energy and environmental designs to reduce negative environmental effects and to promote energy efficiency and sustainable development.

Conclusion

This research paper looked at the following major titles on the economic planning of the Saudi economy; how the Saudi economy was built up and the resources it depended upon to build it, the connection between the Kingdoms economic planning and its resources, the diversification plans, economic cities, and the role of the private sector in the economic development of Saudi Arabia.

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References

  1. El Shekh, A. The Legal Regime of Foreign Private Investment in Sudan and Saudi Arabia. Cambridge: Cambridge University Press.
  2. Niblock, T. The Political Economy of Saudi Arabia. London: Routledge. 2007
  3. Mallakh, R. Saudi Arabia: Profile of an Economy and Investment. London: Taylor and Francis. 1982.
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