Economic Growth in Saudi Arabia

Economic Growth in Saudi Arabia

Determinants of Economic Growth: the Case of Saudi Arabia

Economic growth is a top priority among both industrialized and developing nations. Economic growth has a positive effect on society by promoting a higher standard of living and improved social welfare systems. Economic growth has attracted considerable academic attention in the past several years. As a result, methods have been developed that attempt to interpret and classify the most important determinants of economic growth. Studies concentrate on a group of determinates that are considered to be the most important ones. These include labor, capital, exports, government expenditure, financial innovation, and private investment.

The Kingdom of Saudi Arabia is known for its continuous economic growth during the past few decades. However, it now faces challenges and social problems of that threaten to affect its ability to achieve an acceptable level of sustainable economic development in the future. Sustainable development is necessary if Saudi Arabian citizens wish to achieve a higher standard of living. During the past three decades, the Saudi economy passed through several different stages. It experienced a high level growth during the 1970s, which was followed by a period of economic stagnation during the 1980s and 1990s. Economists have largely attributed this to fluctuations in oil prices and the revenue that could be derived from this essential Saudi Arabia and resource.

Significance of the Study

This study will address the most important variables that affect the growth of the Arabian economy. It will focus on the oil industry, as Saudi Arabia represents over 25% of the total GDP among oil producing countries in the Middle East. With Saudi Arabia oil production playing such a key role in the overall economy of the Middle East, finding methods of that can accurately predict its future economic growth will have an impact not only on Saudi Arabia, but on the rest of the Middle East and the rest of the world that is affected by fluctuations in oil prices. This study that will explore methods to better predict the future of the Saudi Arabian economy using key economic indicators.

Background and Statement of the Problem

Methods for determining economic growth are widely varied. The variables chosen and the weight that they are given in the model depends on the economic structure of the country in question. Methods for modeling economic growth must take into account which factors have the greatest impact on the economic outcome of the country. For Saudi Arabia, oil is the most obvious natural resource and represents the largest industry sector. It is this sector that has the greatest impact on long-term economic growth.

Anaman (2004) conducted a similar study of factors that were most important in determining the long-term economic growth of Brunei Darussaiam. A multiple regression analysis was performed based on cointegration techniques that were used to construct a model. The model was based on the annual growth of real GDP, which served as the dependent variable. The author explored several independent variables which were the annual growth of total exports, the government size, the total investment to GDP ratio, annual growth of labor, and a dummy variable that represented the effect of the 1997/1998 Asian financial crisis. The results of the study found that the growth of exports significantly influenced long-term economic growth rates, as suspected. Government size was found to be the second most important factor influencing long-term economic growth. The relative size of the government influenced the long-term growth rate in the form of a cubic function. It was determined that large government sizes impeded economic growth, while moderate government sizes enhanced economic growth.

Another study conducted by Asseery & Al-Sheikh (2004) examined economic growth determinants in the Kingdom of Saudi Arabia between 1964-2001. The study used military spending, financial development, exports, government spending, labor, and investments as their independent variables. The study found that all variables except investment, are important determinants of economic growth in Saudi Arabia. However, the study noted that oil exports seem to have the strongest correlation with the economic growth, above all the other factors combined.

Plasolo & Bank (1995) found that disparities between growth rates of different countries are only partially explainable by the basic factors of production. The study used a time series analysis to examine growth factors in the economy of Korea. The results found that human capital, investment, and exports enhanced economic development positively. It was found that inflation and government consumption influenced economic growth in a negative manner.

These studies demonstrate various ways in which economic factors can influence the ability to predict economic growth. These examples provide suggestions for the independent variables that could be used in the conduct of the study. This study will address the problem of determining which indicators of economic growth are the best representation and which have the best predictive value in estimating oil-based revenue growth in the Saudi Arabian economy.

Hypothesis and Research Questions

The research hypothesis will state that the factors of labor, capital, exports, government expenditure, financial innovation, and private investment will be predictive of future economic growth in Saudi Arabia.

In order to understand this hypothesis in greater detail the following research questions will be addressed.

1. What role will the oil industry play in determining the economic future of Saudi Arabia?

2. How much weight should each of these factors receive to have the greatest predictive value?

3. Which factors will have the greatest importance?

4. Will factors that were important in the past have the same importance and predictive value in the future?

Aims and Objectives

The aim of this study is to develop a method for predicting the future economic growth of Saudi Arabia. The primary objective will be to develop a model that can successfully predict economic growth in Saudi Arabia and other developing countries. A secondary objective will be to test the new model in the Kingdom of Saudi Arabia and to evaluate its performance. The third objective will be to determine the effects of the Asian economy crisis on the model. This model will be important in helping decision makers in Saudi Arabia achieve a steady rate of sustainable growth. In order to achieve these objectives the model will have to take into account the importance of the oil industry, as well as the overall economic structure of Saudi Arabia.

Study Design

Study Methodology

This study will use a combination of methodologies to achieve its objectives. It will use a descriptive methodology that will include the conduct of a theoretical review of economic growth determinants. It will focus on the Saudi economy using studies that have been conducted by other parties in the past. It will only consider studies that are published by credible academic sources and government agencies in order to keep data credibility intact. The second method to be used will be an empirical methodology. This portion of the study will involve designing a model for analyzing the time series data to determine the short- and long-term relationship between economic growth the various determinants under study.

Study Population and Sampling

Sampling data will only be derived from the Kingdom of Saudi Arabia using sources that cover the period from 1970-2005. Data will be collected from the Saudi Arabian Monetary Agency (SAMA). Sources of data will include annual reports, statistical reports published by the General Department of Statistics (GDS), Ministry Planning Reports (Developments Plans Achievements) as well as IMF and UN publications.

Data Collection Methods and Instruments

The data collection method will involve an examination of existing reports and sources on the determinants of economic growth in Saudi Arabia. It will include materials that include tables and charts of various trends. It will also include narratives and descriptions of the effects of different determinant of economic growth. The key instruments to be used in this research study will include tables, charts, and various forms that will help to organize the data in a way that will make it meaningful. The final form of these tables and charts will be dependent upon the form and types of data that are found during the conduct of the research.