EXPANSION VS GROWTH: THE CASE OF SAUDI ARABIA

This study argues that historical, technical, and institutional variables interact to distinguish oil production from the production of other export commodities. In turn, this distinction burdens an oil economy such as the Saudi economy with a set of unique costs and benefits that are governed by the non-renewable nature of oil deposits. On the one hand, the fact that oil is an exhaustible resource places a time horizon on the associated benefits of its production and export. On the other hand, the vertical integration of the oil industry and its high capital/labor ratios create minimal linkage effects with the domestic economy. Hence, numerous problems of economic management of oil rents confront the Saudi economy since these rents comprise the primary source of the country's national income. In view of these constraints, Saudi Arabia's development experience between 1967-1985 is examined with special emphasis on the need for economic diversification. In assessing the possibilities for diversification, this study traces the Kingdom's development starting with the events that led to its formation as a modern state through the dramatic oil price hikes. The consequent windfalls bestowed on the country contradictory effects of high per capita incomes, extreme vulnerability to export price fluctuations, demographic and spatial dualism, lopsided shares of sectoral value-added in the gross domestic product, and a lack of significant linkage effects between the oil sector and the local economy. The absence of substantial linkage effects is confirmed empirically by estimating several distributed-lag models which examine the relationship between experts and key domestic economic aggregrates. This study concludes that, despite comparative advantage considerations, Saudi Arabia's diversification drive on the basis of its vertically integrated heavy industries sector does not spread development. Light manufacturing geared towards the Gulf region is deemed more conducive to development. Starting with consumer consumption goods and the production of import-substitutes that are energy intensive and moving to consumer durables, basic metals, and chemicals, would mobilize reproducible factors of production more effectively and lay the basis for sustained development and growth.