Economic development in Saudi Arabia Essay

The topic about economic development has become contentious among many economists in the global scene. The paper focuses on economic development in Saudi Arabia. Discussion about the various concepts and theories about economic development has been introduced. An investigative approach has been applied in the analysis of the various factors affecting the economy of the country. All the theories and aspects of economic development identified have been integrated in the essay by providing a link between theory and practical aspects of the topic. The major emphasis is about the economy of Saudi Arabia (Bourland, para 5-9). Economic development is the establishment of new structures within an economy. Structural changes are brought about by the establishment of new infrastructures and programmes, for example; the condition of health and education in a country, population control policies, and many others. It is the expansion of both macroeconomic and microeconomic aspects of a country and does not focus only on the income of a country. Economic development is measured by the advancement of both private and public sectors in an economy (Arndt, pp. 457-466). Economic development is measured by the use of several parameters such as the improvement on the living standards of the people in a country, new infrastructures being introduced in an economy, increase in the national income and many other factors. Measuring economic growth by the use of one scale may become inefficient since there are many factors affecting the economy and its people. While assessing the aspects of economic development in a country, the main focus is on the long run status of the economy and the changes brought about by the government in a long period of time. Deviations are bound to happen in the short run; that is why the short run period is not adequate enough to measure the economic development of a country (Arndt, pp. 457-466). Background information about Saudi Arabia Saudi Arabia covers a geographical area of 1,960,582 million sq. km. and has four cities; Riyadh, Jeddah, Makkah and Dammam. The terrain of the country is mainly a desert with rugged mountains in the southwest. The country experiences an arid climate with extreme temperatures in the interior. At the coast there is high humidity and temperatures. The total population of the country is 28 million with an annual growth rate of 1. 9 percent. The main religion is Islam and the official language is Arabic. The country is known to be the home place of Islam. the culture of the country is conservative and strict Wahhabi interpretations of the laws of Islam are adhered to by the Muslims. The literacy levels have been estimated to be at an average of 78. 8 percent with a great difference between men and women (male 84. 7 percent while female 70. 8 percent). The workforce is composed of 6. 49 million people with 35 percent being foreign workers. Monarchy is the system of government in the country and the constitution is based on the Holy Qur’an (Bureau of Public Affairs, para. 1-4). The kings are selected from the royal family. The king then establishes the government and the ministers to serve in the government. Saudi Arabia has joined World Trade Organization recently to promote trade in the country. The country is also a member of OPEC (Bourland, para 41). Economic development of Saudi Arabia As per the 2008 statistics the economy of Saudi Arabia had a gross domestic product of $527 billion with an annual growth rate of 6. 1 percent. The natural resources of the country are â€Å"Hydrocarbons, gold, uranium, bauxite, coal, iron, phosphate, tungsten, zinc, silver, and copper† (Bureau of Public Affairs, para. 5). Agriculture accounts for a small percent of the economy of the country. The main industries in the country are â€Å"crude oil production, petroleum refining, basic petrochemicals, ammonia, industrial gases, sodium hydroxide (caustic soda), cement, fertilizer, plastics, metals, commercial ship repair, commercial aircraft repair, and construction. † According to Bureau of Public Affairs (para. 5) the exports of the country in 2008 were valued at $364 billion while the imports where valued at $103 billion. In 2009 the exports were worth $180. 5 billion; petroleum and petroleum products accounted for 90 percent of the total exports. The government has established international relations with many countries in the world (Bourland, para 17). U. S. is the leading importer of oil products from Saudi Arabia. In 2008 oil exports were sold as follows â€Å"US 17. 2%, Japan 15. 3%, South Korea 10. 2%, China 9. 4%, India 5. 9%, Taiwan 4. 6%, Singapore 4. 4%. † the country made imports worth $86. 61 billion in 2009. The main imports are machines, equipment, foodstuffs, chemicals, automobiles, and textile products. As per the data collected in 2008 the import partners are â€Å"US 12%, China 10. 4%, Japan 7. 6%, Germany 7. 3%, South Korea 5. 1%, Italy 4. 7%, India 4. 5%, UK 4%† (Bourland, para 29). Oil is the dominant economic product produced by the country for local use and export. It accounts for more than 90 percent of the exports of the country and 75 percent of the revenues collected by the government. Oil was discovered in the 1930s and large scale exploitation of the resource was done after World War II. The economic development of the country has been achieved through the sale of oil products to many countries in the world. Saudi Arabia has the largest oil reserves in the world and is the leading producer and exporter in the world. The government has control over all the oil produced in the country (Bureau of Public Affairs, para. 14). The increasing oil prices have made Saudi Arabia achieve fast economic growth and development. The country has enjoyed surplus balance of deficit in trade with other countries. The revenues collected from trade in oil are used to strengthen the defense of the country, carry out development programmes and to assist other Arab and Islamic countries. Saudi Arabia has influenced OPEC to raise the oil prices. This increasing demand for petroleum products is creating a lot of revenues to the country and there have been many expansions in the industries in the country (Bureau of Public Affairs, para. 16). To increase access to many foreign markets the country joined World Trade Organization in 2005. The government has encouraged foreign direct investment in the country to expand most of its industries. The living standards of many people in the country have been uplifted by the income from the sale of oil and its products. The government plans to expand the economy while maintaining its traditional Islamic values and customs (Bureau of Public Affairs, para. 31). The surplus budget of the country has enabled the government improve the education system and job training to its citizens. The infrastructure of the country has been developed to improve the economic activities. The government provides good wages and salaries to its employees to promote the living standards of the people (Bourland, para 13). Saudi Arabia has successfully entered the business world. According to World Bank Group (para, 1-6) â€Å"the Kingdom of Saudi Arabia has been rated as the 13th most economically competitive country in the world, according to the International Finance Corporation (IFC)-World Bank annual â€Å"Doing Business† report issued for 2010. † The government has enacted several reforms in many sectors of the economy to open up the market of the country to external investors. This has attracted many investors and the country is experiencing rapid growth in the business sector. The country has been ranked as the best in terms of business activities in the entire Middle East as well as in the Arab World (Bureau of Public Affairs, para. 51). International relationship with other countries has been improved to maintain peace in the region and to avoid conflicts which may affect the economy of the country. The government has established several embassies with foreign countries. Saudi Arabia has maintained good relationship with US for a long period of time. The two countries have been trade partners and they exchange products as well as other resources. U. S. has been the major importer of oil products from the country. Europe and Japan have also been good trade partners with Saudi Arabia and trade has been facilitated through establishment of agreements and negotiations. To maintain peace in the region, the Saudia government funds security agents to keep peace in the neighboring countries as well as other Arab countries (Bureau of Public Affairs, para. 19-25). The good relationship between U. S. and Saudia government has promoted security in the country. For example, â€Å"the United States has sold Saudi Arabia military aircraft (F-15s, AWACS, and UH-60 Blackhawks), air defense weaponry (Patriot and Hawk missiles), armored vehicles (M1A2 Abrams tanks and M-2 Bradley infantry fighting vehicles), and other equipment† (Bureau of Public Affairs, para 33-41). The Saudia armed forces is supported with weapons and training facilities by the U. S. government. The U. S. Army Corps of Engineers were used in the construction of military and civilian structures in the country. U. S. has promised to sell advanced defense military equipment to members of Gulf Cooperation Council (GCC). This is a strategy to improve self-defense of the members of GCC (Bureau of Public Affairs, para. 26-31). The economic development of Saudia continues to be affected by poor policies about human rights practices. Discrimination against women has remained a great challenge to the government. Ethnic and religious minorities are also not favored by the policies of the country. There are restrictions on freedom of speech and this has caused a global concern over the rights of the people to express themselves freely in the country. The press has been closely monitored by the government and strict rules have been placed to hinder spread of some information about the government. Several cases of abuse of prisoners have been reported as well as detention to citizens who are not guilty. Other human rights issues affecting the country are suppression of the rights of the workers, and the denial to change the government by the citizens. Since economic development is not only measured in terms of the GDP; the country is still lagging behind towards achieving success in the promotion of the economy (Bureau of Public Affairs, para. 32-40). The increasing population in the country is creating a great threat to the economy of the country. As the population increases more strain is placed upon the resources of the country. If the trend is not reversed the country will have inadequate resources to cater for the needs of its people. The excess control of the government to the private sector is creating threat to expansion of the private investments in the country. Foreign investors fear the strict policies established by the government upon the private investment. The system of the government also restricts growth and development of the economy since the kings come from the royal family. A democratic system of government is better since it encourages competition and good performance. Such a system increases the freedom of the people to express themselves and also provides rights to the citizens (Bourland, para 34). The global economic recession of 2007-2009 and its impacts on Saudi Arabia The economy of Saudi Arabia was affected by the global recession experienced by the world economies in 2007-2009. An estimated growth rate of -0. 6 percent in 2009 was achieved due to the poor performance of the global economies. 5 percent inflation rate was registered in the year 2009. Unemployment in the FY 2009 was estimated to be 11. 6 percent among Saudi males. The public debt of the country increased to 20. 3 percent in 2009 while the revenues declined to $167. 7 billion the same year. The public expenditure increased to $164. 3 billion in 2009. The economic recession can be traced from the subprime mortgages of the US. The banking sector in US issued many loans to subprime mortgage intermediaries. Due to the expanding market in the sub prime mortgage markets, many banks issued unsecured loans to the intermediaries. The climax of the boom was reached in 2007 when the prices of products started to increase and many subprime mortgage lenders were unable to repay their loans. This led to massive default of debts and banks registered huge losses. This reduced the lending capacity of many banks. The resulting effect was lack of credit in the economy and the collapse of many companies (Stapledon, pp. 29). Sub prime mortgages are policies which have a high risk of default. Subprime borrowers are the people with low incomes and have a poor credit history. They have higher risk of default compared to the prime borrowers. The US government had deregulated the real estate mortgages leading to massive investment in subprime mortgages. This caused the risky lending of subprime mortgages. The subprime mortgages were not popular initially but they became widely used in the 1990s. The climax of the sub prime mortgages was in 2006 when they accounted for more than 21 percent of all mortgages traded in the US market. The value of subprime mortgages in 2006 was valued at $600 billion. Many subprime mortgage intermediaries were established to reap the benefits of the expanding industry (Helleiner, pp. 44). Since the US is a major export partner to Saudi Arabia, a ripple effect of the economic crisis was felt in the country. Other economies were also affected and Saudi Arabia experienced declining exports for oil products. The imports purchased by the country were affected by global inflation and the country’s budget increased. Other economies declined since they had no market for their goods and Saudi Arabia reduced the oil exports. The entire world encountered economic crisis which resulted into failure by all sectors of the economy in the world (Stapledon, pp. 63). High levels of unemployment were experienced as industries closed down. International trade was affected by the economic crisis and this affected all sources of employment leading to high levels of unemployment. Poverty increased and the living standards of many people declined. Family incomes were low and the people barely survived through the hard economic period. The low incomes that people had could not buy the products in the market due to high rates of inflation. In the global economies, the crisis was at the peak in July 2008 but afterwards, it started to decline. The decline of the crisis started towards the beginning of 2009. The economy of Saudi Arabia has started to regain from the crisis. The economy has not yet recovered and a lot of investment is required to regain the normal economic situation as before. It will take a lot of time for the economy of the country to recover completely from the impacts of the crisis (Helleiner, pp. 35). Current strategies The government has introduced new strategies to promote economic recovery from the economic recession experienced in the recent past. The government of Saudi Arabia is encouraging private investors to extend investment in other sectors of the economy to avoid overdependence on oil. Only ten percent of the industries are non-oil manufacturing in Saudi Arabia. This sector provides employment to about six percent of the working population. This condition has been identified as risky and urgent measures have been adopted to reverse the trend especially after the global recession experienced in the country last year. The economic crisis affected the country due to over-dependence on oil as the main economic product. Other sectors have been neglected and this has created a major risk to the economy of the country. The government has permitted private and foreign investors to participate in telecom and power generation industries. Foreign direct investment has been encouraged by the government to increase the economic activities in the country as well as provide employment to more people (Bourland, para 38). Conclusion Economic development measures to changes in the structures, population, and the welfare of the people living in a country. The economy of Saudi Arabia has developed tremendously over the years due to the wealth of natural resources bestowed upon the country. Oil and other petroleum products are the main economic products produced and exported by the country. The country has established good relationship with other countries. It participates in trade with several countries. The government has offered assistance to neighboring countries and other Arab countries in terms of finances, peacekeeping and other aspects. The over-dependence on oil and petroleum products has placed the economy of the country at a great risk. Diversification in the economic activities has been encouraged to provide a better position in the turbulent global markets. Saudi Arabia has been adversely affected by the global economic crisis due to over-reliance on oil as the main economic product. The progress towards achieving success in economic development in the country has been hindered by the poor human rights practices experienced in the country. Work cited Arndt, H. W. Economic Development: A Semantic History. â€Å"Economic Development and Cultural Change. † Vol. 29, No. 3. (Apr. , 1981), pp. 457-466. Chicago: The Chicago University Press. Bourland, Brad. The Saudi Economy’s Golden Era: Phase Two. Saudi-US Relations Information Service. August 24, 2007. Brummer, A. â€Å"Turbulence Ahead; the Global Credit Crunch Has Hardly Begun to Bite: Much Worse Is to Come. Alex Brummer Predicts That 2008 Will Present Labor with by Far Its Sternest Economic Test†. New Statesman. Jan 7, 2008. Volume: 137. Issue: 4878. Bureau of Public Affairs. â€Å"Kingdom of Saudi Arabia. † Bureau of Near Eastern Affairs. April 2010. Retrieved May 3, 2010 from; Stapledon, N. , â€Å"Housing and the Global Financial Crisis: US versus Australia. Economic and Labor Relations Review. July 2009Volume: 19. Issue: 2. World Bank Group, Doing Business. 2010. Retrieved May 3, 2010 from;