Saudi Arabia's Economy Has Traditionally

Saudi Arabia's economy has traditionally relied heavily on oil revenues, but in recent years that government has followed the lead of other Gulf nations in taking steps to diversify the economy. The economic plan incorporates several elements.

Among them are improving education, ascension to the World Trade Organization and the development of "economic cities." These reforms are in their early stages, but the government, which exerts tight control over the economy, hopes that over time the nation will be able to use its oil wealth as a stepping stone to a sustainable economic strength, even beyond the point when oil revenues dry up. The present economic system, however, remains heavily reliant on oil.

Oil revenues account for roughly 45% of the nation's GDP of $467.6 billion (World Bank, 2009), 90% if export earnings and 80% of budget revenues (Central Intelligence Agency (CIA), 2009). With relatively high oil prices in recent years, Saudi Arabia now has the 23rd largest economy in the world by purchasing power parity (Ibid.) and the nation has been able to stockpile significant financial wealth and funnel more of its oil income towards building out the infrastructure necessary to diversify the economy.

The diversification effort is at present driven largely by the central government, which has retained a centrally-planned economic system in the early stages of the diversification plan (Ibid). Both historically and still in the present context, the Saudi economy is heavily dependent on oil revenues. This dependency has driven strong growth in recent years, as a consequence of high crude oil prices. The price of crude has generally been at historic highs since the middle part of the 00s (Williams, 2009). This has had several key impacts on the Saudi economy.

The first is that it has allowed the Saudi government to reduce its foreign debt substantially from approximately 18.7% of GDP to 11% by the end of 2008 (Kawach, 2008). In 2009, however, investment flows into the Middle East were compromised by the "implosion" of debt at two family-owned Saudi firms. This issue, which cost investors $22 billion, cast negative light on the lack of transparency and judicial recourse in the country (Abocar, 2009).

In addition to these benefits, the stockpile of wealth derived from high oil prices is being put to use in the country's 9th development plan. This plan is the latest in a series of five-year plans emanating from Riyadh, and carries the central theme of improving the living standards of its citizens (Kawach, 2009). The ninth development plan was made possible by a doubling of revenues during the course of the 8th plan, which ran from 2005-2009.

As a result of these revenues, the Kingdom ran a surplus of SR580 billion in 2008, the sixth consecutive year in which the government recorded a budget surplus (Ibid). At the heart of the 9th plan is to be an opening of the private sector. The objectives the government hopes to achieve by opening the economy to more private sector investment are to provide more jobs for Saudis, raise living standards for citizens, diversify sources of income and increase per capita income.

The latter comes with a concrete objective of SR98,500 by the end of 2024, compared with SR43,300 in 2004, an annualized growth rate of 4.2% (Ibid). All of these concepts ultimately derive from the objectives the government set forth in forming the Supreme Economic Council in 1999 (SAMIRAD, 2009). One of the driving challenges behind these initiatives is the nation's rate of unemployment. Listed at 11.2% in 2007 (Ali, 2008) it had risen to an estimated 11.8% a year later (CIA, 2009).

The economy has jobs -- there are an estimated 5.5 million foreign workers in the country -- but the educational infrastructure has not allowed many Saudis to take advantage of the opportunities within their own country. Jobless rates among certain demographic segments are much worse. Joblessness among Saudi females is estimated to be 26.6% and youth unemployment is especially high. Men and women between the ages of 20 and 24 account for an estimated 44% of all unemployed Saudi nationals (Ali, 2008).

The unemployment issue has become not only a pressing employment issue but a social issue as well. Young Saudi men have taken a view that it is better to be unemployed than to work in menial jobs they consider better for foreign workers (Hardy, 2006). To provide the jobs that Saudis want is a major part of the government's plan to increase private sector involvement in the economy and to increase the nation's educational infrastructure (Ibid).

One element of this plan is the development of the King Abdullah University of Science and Technology (KAUST). This new school, opened in the fall of 2009, is part of a greater plan that has seen the number of state-run universities increase to 20 in recent years. The greater plan, known as aafaq, is a 25-year project that is intended to "improve higher education opportunities for women, boost scientific research" and increase the number of scientists (Sawahel, 2009).

These are precisely the sort of jobs that young Saudis desire, but the lack of infrastructure has barred their access to such positions, which must then be filled by foreign workers. The government's renewed emphasis on education, therefore, is at the cornerstone of its long-term economic diversification plans. The nation is also placing emphasis in other major infrastructure developments, including power and water management, transportation and health care (Maktoob, 2009).

As the bulk of new infrastructure development is just coming onstream, it is difficult to determine the impact that it will have. As yet, that impact is minimal, but this is obfuscated by the economic impact of high oil prices. It is reasonable, however, to expect that a stronger education infrastructure and a loosening of investment regulations will help to diversify the Saudi economy in the long run. Entry to the World Trade Organization has also helped Saudi Arabia along the path of economic liberalization.

For example, under terms of the Kingdom's accession, it must remove any non-tariff measures that are not congruent with WTO rules. The insurance industry has been opened for foreign competition, as has the telecommunications sector (Ghafour & Hanware, 2005). These transitions will have been completed by the present day, with further liberalization to follow as per WTO guidelines. WTO membership also gives Saudi Arabian firms better access to foreign markets and opens the investment climate.

The government has taken other steps to improve the investment climate as well, including the development of so-called economic cities. In the 1970s, two industrial cities were built -- Jubail and Yanbu -- and there are now four others. The Saudi General Investment Authority (SAGIA) estimates that the economic cities will contribute $150 billion to the nation's GDP by 2020. They will create an estimated 1.3 million jobs, bolster the real estate sectors (as has happened in the Jubail and Yanbu areas) and improve regional GDP (SAGIA, 2007).

The Saudi economy today remains an oil-based economy, but the government is taking strong steps to diversify away from oil into other lucrative fields such as technology, insurance and banking and value-added manufacturing. Although the plans have been in the works for several years, the nation's strategy is based on a massive infrastructure build-out.

This is being paid for with the budget surpluses the Kingdom has accumulated over the past six years, which have allowed it to reduce its debt and funnel increasing amounts of its wealth into education, health care and transportation infrastructure. The advent of new education facilities, such as the aforementioned KAUST, is central to the plan.

Not only does this strategy solve one of the nation's most significant social problems -- that of high youth unemployment -- but it also allows the Kingdom to tap into the relatively untapped domestic workforce and replace foreign workers with Saudi ones. Although the coming five-year plan has been built around the concept of improving the lives of Saudis, the full results of the plan are not expected to be yielded for another ten or fifteen years.

Over the coming years, it is expected that oil revenues will remain the most significant driver of the Saudi economy. However, other trends are also expected to continue. Membership in the WTO and a desire to.