Oil-fired growth: Export-led development in Saudi Arabia, 1960-1990

This study examines the role of oil exports in the economic development of Saudi Arabia. It is an econometric application of the staple theory of economic growth to the special case of Saudi Arabia. Because oil revenues accrue directly to the Government, the study focuses on the impact of oil-induced financial linkages on the domestic non-oil economy of Saudi Arabia. It also evaluates the extent to which the high level of government domestic spending has helped bring about structural changes in the key sectors of the economy. It particularly concentrates on the government\u27s efforts to enhance the capital absorptive capacity of the Saudi Arabian economy and to diversify its production and employment structures. To achieve the goals of this study, a simple Keynesian multiplier static model is presented in order to provide a fairly accurate depiction of the impact of oil revenues on the non-oil economy of Saudi Arabia. Next, we offer a modified version of the Samuelson\u27s multiplier-accelerator model to shed light on the dynamics of Saudi Arabia\u27s growth process. To operationalize the staple theory for empirical estimations we employed the Koyck\u27s distributed lag model as our basic tool for the econometric portion of the study and subsequent analysis. Since economic growth in the staple theory is determined by current (the direct effect) and past (the spread effects) export activity, the choice of Koyck\u27s model is appropriate because it is capable of indicating the short-and long-run impacts of the independent variable (oil) on the dependent variables (components of the Saudi non-oil economy). Also, the use of dummy variables is employed in regression equations to test for any additional structural changes which might have occurred as a result of the 1973/74 oil price shock. By and large, the econometric results reveal the dominance of oil revenues\u27 spread effects over their direct effects indicating the supremacy of fiscal linkages over the production (forward and backward) and consumption (final demand) linkages. Although the non-oil economy had experienced some structural changes even before 1973, the analysis shows that the capital absorptive capacity of the non-oil economy had not improved greatly to absorb the large oil-income flows that followed the 1973 and subsequent oil price increases. Nevertheless, the Saudi government launched a massive investment program for economic development of the country, in addition to making large investments in foreign assets abroad. This study, however, argues that it might have been more prudent for Saudi Arabia to adjust the flow of oil revenues equal to amounts matched by the economy\u27s capital absorptive capacity. This would have required the management of both the price and output of Saudi oil. A less ambitious development effort, particularly during the 1973-1981 period, might have proved to be more effective in transforming the Saudi economy. By permitting a more gradual process of adaptation through manpower development and skill formation and a more moderate rate of expansion, the economy might well have avoided the creation of bottlenecks in the form of shortages of infrastructure, raw materials, and consumer goods. With at least one-quarter of the world\u27s known oil reserves and at least half a century of potential oil exports ahead, Saudi Arabia should be able to create a viable diversified economy, with less dependence on oil, in the not too distant future. (Abstract shortened by UMI.