History of Economic Growth in Saudi Arabia

History Of Economic Growth in Saudi Arabia

The economic history of Saudi Arabia dates back to the early civilization of the Arabian Peninsula. The Arabian Peninsula played a central role in shaping the modern economic condition in Saudi Arabia as the key trade center. Various factors shape the economy of Saudi Arabia in different ways. Its location in the desert denies it a chance to practice any form of agriculture or livestock keeping. For many years, the economy of Saudi Arabia relied heavily on trade with its neighbors and the international community. With the development and progress in technology, Saudi Arabia can now practice significant percentage of agriculture and utilize a better portion of the desert land. Oil also forms the backbone of the Saudi Arabian economy today with 90% of its population relying on it for employment. It is now possible to practice agriculture through desalinizing seawater and practicing irrigation in many oases.

Economic Development in Saudi Arabia

Historically, the Saudi Arabian economy depended on trade as its backbone. The Saudi Arabian people, acting as intermediaries and large buyers and sellers of different goods practiced a significant percentage of trade in the Arabian Peninsula for ages. With its strategic location, Saudi Arabia provided the necessary routes to main trade centers, and sources of goods such as the Nile valley and the Mediterranean basin. The network of trade routes also connected Mesopotamia, which was the main source of agricultural goods that were highly sought after in many parts of the Arab world. Significant changes in the pace of economic development in Saudi Arabia occurred when oil exploration and production began in the early years of the 20th century (Owen & Pamuk 229).

The oil industry dominates the Saudi Arabia economy and contributes 90% of export earnings annually. This industry provides employment to the constant rising population of Saudi Arabia in both oil refineries and other related industries. Oil exploration and discoveries in agricultural production methods increased diversification in the Saudi Arabian economy where a large percentage of the population shifted its attention to agricultural production. Through improved agricultural production methods, Saudi Arabia could now produce important food crops such as barley, wheat, tomatoes, citrus fruits, dates and melons. With the discovery of oil and diversification of the economy, the Saudi Arabian economy is currently the largest free market economy in the Middle East. The geographic location of Saudi Arabia further facilitates economic development in the kingdom of Saudi Arabia, which provides easy access to markets in different parts of the world such as Europe, Africa and Asia.

Significant economic growth in Saudi Arabia results from political stability from early 1990s. This environment is conducive for both foreign and local investments, which boost the economy of Saudi Arabia. Stable political environment and strategic economic policies of the Saudi Arabian government have open up the doors for foreign investment and settlement in Saudi Arabia. These laws allow full foreign ownership of projects and real estates. This move has seen many foreign experts and professionals to practice in Saudi Arabia, and consequently raise the economy. Improvement and maintenance of a stable financial sector has also contributed heavily to the development of the Saudi Arabian economy. Application and controlling of the fiscal and monetary policies through the Saudi Arabian Monetary Agency (SAMA) has effectively managed a range of monetary issues in the nation (Ramady 6)

Factors for the High GDP in Saudi Arabia and high population

In relation to the oil exploration and diversification of the economy into agricultural production and manufacturing, the Saudi Arabian population rose significantly from the 1990s. High population growth rate stems from better living and health conditions provided by the growing and stable Saudi Arabian economy. There are no clear statistics concerning the actual population growth rate in Saudi Arabia, but according to one study by the CIA indicate that, the population in Saudi Arabia was over 22 million in the year 2000. The rate of population growth is high such that by 2002 the population estimates were 23.5 million out of which 5.36 million people were non-nationals. Despite the uncertainties in the actual statistical data, it is clear that there is a high population growth rate in Saudi Arabia mainly composed of young people below the age of fourteen. It is also evident that the foreign population dominates the labor market in Saudi Arabia (Cordesman 6).

The population composition in Saudi Arabia explains the reason for the high unemployment in Saudi Arabia despite the rising GDP. The kingdom heavily depends on foreign labor while most citizens of Saudi Arabia remain unemployed. The younger generation does not provide the necessary skills required in the growing oil and manufacturing industries in Saudi Arabia. According to studies by Cordesman the increase in the number of young people in the overall population puts pressure on the economy's ability to absorb them (6). Unemployment is estimated to remain a big problem in Saudi Arabia for the next two decades despite measures put in place to curb the rising population. The per capita income of the large number of foreigners is high, but the majority of Saudi Arabian citizens experience low per capita income due to lack of jobs. Dependence on foreign labor stems from the poor education system in Saudi Arabia that is not receptive to global changes and demand. The education and infrastructure systems do not produce qualified citizens to take part in the changes brought by the discovery of oil and the growing manufacturing industry.

Many factors contribute to the high GDP in Saudi Arabia despite the high population and high numbers of unemployment. Among the factors that contribute to high GDP is the discovery of oil and diversification of the economy into agriculture and manufacturing. Exportation of large amounts of oil to all parts of the world allowed the nation to import industrial machines, and agricultural equipments to diversify the economy. This improved the living standards of many people in Saudi Arabia thereby raising the national GDP. During periods of low fluctuations in the world market for oil, Saudi Arabia was able to stabilize its financial situation and stabilize the economy. Foreign domination into the labor market also works to raise the GDP of the country although many of its citizens remain unemployed.

However, the high GDP and high unemployment in Saudi Arabia is a result of over dependence in certain sectors of the economy while neglecting the other key sectors that could provide a significant number of employments to the people of Saudi Arabia. Since the discovery of oil in Saudi Arabia, the government diverted its attention to the production of oil energy and failed to diversify the economy by utilizing other resources available in the country. In relation to this failure, any disturbances and failures in the world market for oil result in great effects to the Saud Arabian economy. Disturbances in the oil market create significant effects to the Saudi Arabian financial markets, and this, in turn, influences growth in many other sectors of the economy. According to Ramady the performance of Saudi economy is heavily influenced by two factors: the level of oil revenues and government budget policies (27). Oil revenues influence the budgetary allocation of funds to all sectors of the economy. Business cycles such as periods of boom and recessions in the oil prices determine the pace of economic development in Saud Arabia.

Diversification of the economy is necessary in order to increase employment opportunities to many unemployed citizens in Saud Arabia. Oil and gas sectors cannot fully absorb the high number of the unemployed youth in Saudi Arabia. There is need to raise the GDP of the citizens of Saudi Arabia in order to raise their living standards. Diversifying the economy into other sectors such as service and manufacturing industries can help to increase the number of opportunities for the citizens and reduce foreign dominance in the economy. There is a need to restructure the education system in Saudi Arabia in order to make it more receptive to global changes especially in science and technology. Technical education is necessary in order to produce the highly needed skills in the manufacturing industries. The education system should change its focus from producing graduates for white-collar jobs to technical experts who can replace the foreigners and in turn raise their GDP. According to research by Ramady there is need to create a social awareness, work ethics and civic participation into the creation of wealth (38). If this were nurtured, it would create a more sustainable growth take off.

A knowledge-based economy could help overcome the problems of a rising GDP while there is a growing number of unemployment. Budgetary allocation for human resource development has to be improved, as does the perceived quality of education. Government restructuring is also important in order to reduce administrative barriers especially to start ups despite the availability of loans and non-existence of tax regimes in Saudi Arabia (Ramady 39). In order to solve the above economic problems that result in high levels of unemployment, The Saudi Arabian government has to move away from a state-driven economy that is largely dependent on oil and foreign labor and create a more diversified, private sector led economy.

Keynesian theory of unemployment and the need for government intervention

Keynesian school of thought perceives unemployment being a result of various public decisions, most prominently those on monetary and fiscal policies. Both monetary and fiscal policies are controllable aggregates that can be utilized to remedy an unemployment situation in a particular country. Both monetary and fiscal policies work to influence demand, which in turn influences the level of employment or unemployment. The Keynesian theory can well explain the macro and microeconomic causes of unemployment in Saudi Arabia. Historically, Keynesian economists believed in the power of aggregate demand in determining the level of employment or unemployment in a particular nation. Modern Keynesians and monetarists today believe that both monetary and fiscal policies adopted by a government may affect aggregate demand. The fiscal policies that may affect aggregate demand and subsequent unemployment may include government expenditure and taxation. Monetary policy issues include selling and buying of government bonds with the aim of either reducing or increasing the amount of money in circulation in a particular economy. In order to provide an explanation of the unemployment problem in Saudi Arabia, it is necessary to design a model that explains the macroeconomic factors such as labor demand, labor supply and wage determination (Filc & Kohler 23).

The labor demand in Saudi Arabia is high due to the growing oil and manufacturing industries, but what causes high unemployment rates is the quality of the labor force. The labor force does not meet the requirements of the leading sectors of the economy. This is associated with the poor education structure that does not produce qualified technical experts in the labor market. Over reliance in the oil industry also causes great challenge on the ability of the Saudi Arabian economy to absorb the large number of its labor force. The oil industry, which absorbs a great percentage of the population, faces regular fluctuations especially in the world market prices of oil. These fluctuations affect the labor demand and wage rates to many oil companies in Saud Arabia. Fluctuations in the wage rates cause an unwillingness to work for many people in the nations (Filc & Kohler 24). Keynes explains that, economic fluctuations are due to the rigid nature of prices that affect economic conditions, which leads to further fluctuations in government expenditure, investment or consumption. The level of employment is highly determined by government expenditure, which influences the level of output and demand. The Saudi Arabian government does not believe in taxation as a means of controlling macroeconomic problems. The government does not tax most of the economic activities in the country, and this has the effect of the government failure to regulate most of the economic operations that can either reduce or increase the level of unemployment.