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Abstract

Saudi Arabia is one of the Gulf States and has sustained good economic growth. Saudis economy mostly relies on oil revenue with a total of 75% contribution to the government revenues. Oil also accounts for 90% of the total export revenue. For the last four decades, there has been a tremendous economic growth due to the increased oil revenue, leading to the improvement of many infrastructural facilities like roads, railways, airports, sea ports, and schools. There has been a great concern of the government regarding the need to diversify economic activities in to the non-oil sector. This came as a result of the uncertainty of the oil market prices. Therefore, more diversification into sectors like agriculture, industry, trade has been encouraged. Such non-oil private sector has helped to add more revenues into the economy, thus raising GDP. However, much still needs to be done to improve the government facilities which are not in a good shape. The rate of unemployment is still very high, especially considering that half of the population is less than 25 years old. This involves building good training facilities to equip them for the job market. Most of the private sector jobs are held by foreigners. All in all, Saudi Arabian economy is growing steadily. What will matter is the plan the government will put in place and implement to ensure that standard of living of all Saudi nationals is rasised.

Introduction

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The Kingdom of Saudi Arabia occupies a geographical area of 2,149,690 square kilometers in the Gulf region. Its capital city is Riyadh and is inhabited by about 4.7 million people, according to the 2009 estimates. Other cities include Jeddah with a population of 3.2 million people, Mekkah with a population of 1.5 million people, and Khobar/Dammam/Dhahran with a total population of 1.6 million inhabitants. The 2011 estimates put the total population to be 26.1 million with 5.6 million of the people being foreign nationals. The rest (20.5 million) are the native Saudis. The terrain of this kingdom is majorly desert with the southwest part containing some rugged mountains. It experiences extreme temperatures in the interior parts of the country. The coastal parts have high temperatures and humidity. Islam is the main religion with Arabic as the official language. The work force in this kingdom is driven by about 7.3 million people with 80% of them being foreign nationals (Rogers, Sedghi 2011).

Saudi Arabia’s 2010 GDP estimates put it at $622 billion with an estimated annual growth rate of 3.7 percent and $24,200 per capita GDP. The main source of economic boost of this monarchy comes from its rich natural resources which include the following: gold, coal, hydrocarbons, zinc, copper, uranium, phosphate, bauxite, tungsten, and silver. The agricultural sector is also a substantial contributor to the economic development. Some of the agricultural products are: livestock, dates, grains, and vegetables. About 1.76% of the total land of Saudi Arabia is arable. Therefore, it is utilized to produce agricultural goods, which play an important role in the economy. Industrial sector can not be equally ignored. This sector is important in the production of the products which are mostly exported for revenue income. Some of the products are also consumed locally. These industries include: petroleum, cement, petrochemicals, fertilizer, and light industry. Large share of the work force, including foreigners, is employed in these industries. Saudi Arabia is also involved in export and import trade. The main export comes from petroleum and petroleum products. The 2010 estimates put this at $238 billion. It also imports goods worth $88 billion annually. Major partners that Saudi Arabia trades with are China, the U.S., India, Germany, Taiwan, the U.K., Singapore, Japan and South Korea.

Saudi Arabia’s Economic Background

For a long time oil has been the economic backbone of the Kingdom of Saudi Arabia. It was discovered in 1930s by geologists from the United States. After this discovery, there were small explorations done until the Second World War was over. In 1960s the large scale started giving much wealth to the kingdom. This translated to the rapid economic growth during the 1960s and 70s. This is the period when the kingdom’s economic situation rapidly improved with much infrastructural developments. Presently, Saudi Arabia has the world’s largest oil reserves, estimated to be 263 million barrels. This is more than a quarter of the world’s oil reserves. Due to this fact, the kingdom is the largest oil producer and exporter. 90% of the total exports are oil-based, providing almost 75% of the total government revenue.

Saudi ARAMCO is the largest parastatal body mandated to produce oil on behalf of the government. It became the world’s largest oil company after absorbing SAMAREC, State Marketing and refining Company in 1993. Export oil is majorly transported by the means of tankers between production terminals within the Gulf region, while some are transported using pipelines to the Red Sea port known as Yanbu. The sharp rise of oil revenues during 1970’s was propelled by the Arab-Israel war in 1973. Saudi Arabia became the main oil exporter from the region. It increased its trade with more countries, something that led to more revenues for the government to use in economic development. The revenue was used to support other Islamic and other Arab countries besides improving its own infrastructure and defense. It was indeed the world’s fastest growing economy during these years (Wael 2012).

The price of oil continued to rise during this period, something that led to more oil fields being developed around the world. In effect, the total consumption of Saudi oil around the world decreased. By mid-80s, there was a big increase in the new oil fields in different parts of the world. Saudi’s oil production was certainly affected. There was a decrease of the oil production from 10 million barrels per day in early 80s to about 2 million barrels per day by 1985. Measures to take care of future uncertainties had to be put in place for the first time. During this period, Saudi Arabia encountered considerable budgetary deficit and some of the foreign assets had to be drowned down. The economy was greatly affected by this condition. The Gross Domestic Product that had been increasing, declined by 1985 as shown in table 1 below. The table shows the International Monitory Fund’s estimates on the decline in the GDP between 1980 and 1985. This was from 546,602 million Saudi Arabian Riyals to 376,318 million Riyals. It only recovered during the subsequent years. This situation eventually affected their position in the OPEC as the swing producer. Production quota was introduced by the OPEC to ensure that all member countries contributed to the world oil production. Saudi Arabia, until this moment works within the quotas set by the OPEC to ensure that stability is realized in the international oil market.

Year

GDP

Exchange in US Dollar

Inflation Index
(2000=100)

Per Capita Income
(as % of USA)

1970

32,365

4.50 Saudi Arabian Riyals

 

 

1975

263,470

3.52 Saudi Arabian Riyals

 

 

1980

446,502

3.59 Saudi Arabian Riyals

93

44.84

1985

276,418

3.62 Saudi Arabian Riyals

90

59.33

1990

337,534

3.74 Saudi Arabian Riyals

94

34.13

1995

453,504

3.74 Saudi Arabian Riyals

106

29.29

2000

805,568

3.74 Saudi Arabian Riyals

108

27.50

2005

1,263,700

3.74 Saudi Arabian Riyals

108

34.53

Table 1: Trend in Saudi Arabia’s GDP as estimated by IMF

In 1997, Saudi Arabia experienced another challenge. This was due to the low oil prices, a scenario that was brought about by the El Nino that resulted to the warm winter in the western side of the country. There was also an economic crisis in some of the East Asian countries. Most importantly, an increase in the amount of oil produced by the non OPEC countries led to the decrease of oil demand. The result was a decrease of oil price by more than one third of the original.

Despite of the above challenges, the international demand of oil has continued to rise. This has prompted ARAMCO to continue expansion with an aim of increasing its oil production. In 2009, it expanded its production from 11 million barrels per day to 12 million barrels per day to keep up with the demand. The parastatal is still investing much on the petrochemical sector. The Saudi government also has plans of doing expansion to mining and refining to help boosting the economy. Joining the World Trade Organization in 2005 has also helped improve the international trade and opening up the country to foreign investors. This has been also an important step in ensuring that the market can easily access foreign goods and services.

Development Plans for Diversification

To achieve the required developments simultaneously keeping the traditional Islamic culture, the government has always used five-year development plans. This was initiated to ensure that the revenue is allocated in a manner that develops most of the underdeveloped regions. The plan was also initiated to ensure that its oil dependent economy would be transformed into a modern industrial one. So far, the plan has made great strides into improving living standards of the people. There is also tremendous infrastructural improvement in most parts of the kingdom. Nevertheless, many planned developments are yet to be achieved. This has been due to the rapid increase in population, which has strained the ability of the government to continue with the improvement plans. This has prompted the government to diversify economic activities, especially towards industry and agriculture, to boost the oil revenue. Another big obstacle to the ability of economic diversification is the mismatch of the available jobs and what the Saudi graduates know. This has led to the job market flooded by foreigners. In fact, by 2010, 80% of the total working force was foreigners.

In the first two development plans, emphasis was made on the infrastructural improvements. The period covered the 70s. This period marked the beginning of substantial improvement in most of the kingdom’s infrastructures, more seaports were built, a triple-length of the total paved highways was realized, and the total generated power was tremendously increased. The third plan, which was between 1980 and 1985, marked a shift of goals with less emphasis given to the infrastructure than health, education, and social services. There was also the plan of diversification to the industrial sector to boost economy. It was not fully attained in various parts of the kingdom apart from the completion of Yanbu and Jubail, two industrial cities that were built to manufacture the fertilizers, steel, petrochemical products, and other refined petroleum products.        

1985 to 1990 marked the fourth development period. By this time, much of the infrastructural developments had been finished. Areas that had not been adequately dealt with were education and training. This also marked many changes that affected the economy. Foreign investments were allowed with either Saudi private companies or the public ones. Saudis were also very much encouraged to start private enterprises. The encouragement of the private sector has led to great contribution to the economic revenues. Out of the total non-oil GDP, private enterprises contributed 70% by 1987. Trade and commerce were the major areas that defined private sector. Although things slowly changed by the diversification to other areas like banking, industry, construction, and agriculture. It is worth noting that private investments were encouraged by the incentives that the government generously provided.

The following plan (1990-95) was set to ensure that the country’s social services were efficient and improved. Employment through private sector was very much encouraged to ensure that the native Saudis replaced the foreigners in the job market. This is also the period that Saudi Arabian government emphasized more on the regional development with the neighbors for economic gain. The sixth plan was aimed at ensuring that the government provided services to the citizens affordably. This was also the period when more pressure was exerted to ensure that the economic growth was not purely dependent on oil. The need to diversify economic activities to other private sector like agriculture and industry was encouraged. Saudi nationals also continued to be absorbed into the labor market (Business 2009).

The roles played by private sector and other diversifications were the main emphasis during the seventh plan (2000-04). Targets were set to ensure that private sector played a bigger role in the economy than before. The projections were made to ensure that the private sector greatly contributed to the non-oil GDP. The targets included creation of over 800, 000 jobs for the Saudi citizens. The following plan majorly dealt with education and training. There was a need to have an economy based on knowledge. Therefore, more technical universities and colleges were built to ensure that those who took part in the economy could easily diversify their activities. Most importantly, women were included to become equal members of the society. They were allowed to receive education in order to take part in the building of the economy (U.S Department of State 2011).

The current plan is the ninth one (2010-14). The main challenge that it considers is to tackle the poverty. To achieve this, it plans to increase developments in medical services, and infrastructure, expand educational capacity, and increase residential housing. Within these five years, there is also the target of increasing GDP by about 15%. The current unemployment rate is 9.6%. The current plan seeks to major on the human resource development through government investment with a view of cutting down on the unemployment rate to 5.5% within the period. Generally, there is an indication of good improvement trend in the Saudi Arabian economy. The development plans have helped in improving standards of living of the people. Compared to other Islamic nations, Saudi Arabia is doing better, going by their ability to implement the necessary developments for the economic growth and at the same time not compromising their traditional Qur’an law.

Year

Gross domestic product, constant prices

 

 

1980

6.519

1981

4.691

1982

-11.098

1983

-8.217

1984

-3.088

1985

-4.324

1986

5.09

1987

-3.984

1988

8.223

1989

0.063

1990

8.328

1991

9.104

1992

4.628

1993

0.027

1994

0.665

1995

0.201

1996

3.384

1997

2.592

1998

2.835

1999

-0.748

2000

4.865

2001

0.547

2002

0.128

2003

7.659

2004

5.268

2005

5.553

2006

3.158

2007

2.017

2008

4.23

2009

0.095

2010

4.147

Table 2: Year on Year changes of Saudi Arabia GDP growth.

Saudi Arabia GDP Growth Rate

The Gross Domestic Product (GDP) of Saudi Arabia has been expanding with time as shown in Table 1 above. The only exception is during the 1980s when many countries discovered and started exploring their own oil resources. It should be noted that Saudi Arabian economy is oil dependent. Therefore, anything that affects the demand or supply of oil will eventually translate into economy being affected in one way or the other. This explains the reason why the government still controls those major parts of this economy. Since 1969, the average growth rate in GDP has been 5.03 percent. The historical peak was reached in December, 1974 at 27.49 percent. The historical record of the lowest average GDP growth was in December, 1982 standing at -11.10 percent. See table 2 above.

According to the data shown in figure 1below, the period between 2000 and 2012 has marked GDP growth in different levels. This data shows the recent trend in the growth rate in Saudi Arabia’s GDP. 2004 marked the highest rate of GDP by 7.66 percent. On the other hand, the lowest recent growth in GDP was in 2003 with only 0.13 percent growth change. It is interesting to see an increase in GDP growth from the year 2010 to 2012. In 2010, there was a registered growth of 0.6 percent, something that improved to 4.1 percent the following year. An increase to 6.8 percent in 2012 shows some positive trend in the economic growth of the country. There is an indication of positive growth in the economy.

Non-Oil Economic Contributors

Industries

It is now clear that oil is the main contributor in the Saudi Arabia economy. However, as it has been mentioned above, diversification is something that the government has been trying to do in order to ensure that other sources are well exploited to support the existing ones. The government has helped to establish some companies to ensure that this is achieved. The companies were supposed to provide and ensure that economic activities were diversified to maximize the natural resources within the country. This was also an avenue to provide employment for the Saudi citizens. Saudi Arabian Basic Industries Corporation is one of such companies (SABIC). SABIC is the largest non-oil company in Asia. It was established in 1975 after a royal decree and mandated to produce fertilizers, chemicals and polymers. It remains one of the major companies that are important for the Saudi Arabia’s economy. This is in terms of revenue and employment opportunities. Some of the

Figure 1: Saudi Arabia GDP growth rate between 2000 and 2012.

petrochemical products that the company produces in large scale include: methanol, polypropylene, glycol, polyethylene, ethylene, and steel. It has a corporate credit rating of ‘A’. It has an asset base of around $72.4 billion, makes a profit of $5.8 billion from revenue of $40.2 billion. The production capacity of this company has gradually increased over the period of its existence. More expansion has been planned for this company to increase the production capacity to about 135 million metric tons per year by 2020 (MEED 100, 2009).

Another company known as Ma’aden was formed in 1997 to oversee mineral resource development in Saudi Arabia. This company has in the past majored very much on the gold mining, leading to the establishment of various gold mines such Al Hajar, Sukhaybarat, Al Amar, Bulghah, and Mahd Ad Dahab. Ma’aden has shown its interest in expanding activities to other areas like aluminium and phosphate.  This has been seen in the signing of a deal with Alcoa, a US aluminium company to build an aluminium complex worth $10.8 billion. An aluminium refinery and a smelter are to be built under this agreement. The facility is supposed to start its operations in 2013, something that will greatly improve the economy through job creation and the revenue collection. There are also other industries that make substantial contribution to the economic growth. These deal with the manufacture of cement, fertilizers, and other light industries.

Trade

Joining the World Trade Organization (WTO) of Saudi Arabia was meant to open up its market for the goods from other countries. Initially, there was much discussion on the extent that Saudi Arabia was ready to open up its market to foreign investment. For a long time, Saudi Arabia has been one of those countries with less foreign involvements. This has, however, changed due to its joining WTO. It should be noted that even though this is the case, much still needs to be done. Saudi Arabia is governed by sharia law. Therefore, most of the undertakings within the kingdom must be done within Islamic acceptance parameters. This is the reason why the government is concerned with opening its market to foreign trade.

The establishment of Saudi Arabian General Investment Authority in 2000 helped in encouraging investments from foreign countries. The mandate was also to find ways by which closed sectors, such as insurance and telecommunication could be opened up for direct foreign investment. Despite such challenges, this country still remains one of the places where doing business is easy. This is due to the fact that it is rated as one of the most economically competitive countries.  It is also one of the Middle Eastern countries with high economic growth. Its good economic record can be attributed to the reforms that are being implemented in the economic sector. One of the reasons why this is a conducive business is the stability of its Stock Exchange Market. The companies listed in this market are some of the region’s biggest and most stable. There are also a number of policies underway that are directed at improving the entrepreneurial business in the country.

Trade has been an important sector for the Saudi Arabian economy. Imports and exports with foreign countries have in the recent past increased by capacity. Most of the revenues came from export of petroleum and petroleum products. This is estimated to be $238 billion as per the 2010 estimates. On the other hand, there are a number of commodities that Saudi Arabia requires and, therefore, have imported them from other countries. This is estimated to be around $88 billion. The products that are traded include food products, equipments, textile and clothing, and many other manufactured goods. Saudi Arabia majorly trades with Japan, China, U.K, Taiwan, U.S, France, India, South Korea, Germany, and Singapore (World Bank Report 2012).

Agriculture

The government has tried as much as possible to encourage the growth of agricultural sector. Livestock breeding is much done by the support of the government. The 1.76% of the land is arable. Therefore, this is used for planting dates, vegetables, and other grains.

Domestic Needs

The growing population has led to the constraints of the already existing services. This population is majorly composed of 65% of the youths who are less than 25 years old. There is need to create employment for this youthful group of citizens. Housing has also been a concern due to the high costs involved. King Abdulla’s government has recently past increased spending on infrastructural projects such as new sea ports, transportation links, education centers, airports, and railway. Moreover, there was a budgetary allocation to build some half a million units of affordable houses for the Saudis. Increase in population has been the reason for the increase in domestic demand for oil. The economic growth in this country has improved living standards to some extent. In effect, the domestic need for more domestic oil consumption has really gone up. The need for oil power generation for domestic use is also high, something that is expected to continue rising with time irrespective of the economic growth.

Labor participation among the Saudis is still low and constitutes only 37% in 2010. There is also the concern of women participation in the economy. The last survey rated their labor participation at the rate of only 12%. As mentioned above, Saudi Arabian private sector is majorly occupied by foreign expatriates. Saudis only account for 11% of the sector’s total employment. For this reason, the government has initiated ambitious plan to encourage and absorb more Saudi nationals to enter into the private sector. This is only implemented depending on the current market situation. The saudization scheme has also been designed to allow foreign workers to exchange their jobs with an aim of forming flexibility within the labor market.    

Conclusion

Saudi Arabia has had continued economic growth over the last decades. This has seen many changes in the country’s infrastructures which include roads, railways, schools, airports, sea ports, and housing. The economy has also been diversified through ventures in to other industries like agriculture, insurance, and other private enterprises. Oil has been and still is the backbone of the economy, and with the world’s largest confirmed reserves, it will still play a major role in the Saudi Arabian economy for a long time. It is also recommended to look for other ways that the economy can be boosted through private sector. This has already started bearing fruits by the private sector contributing about 47% of the total GDP in 2010.

The government has been able to gain very strong fiscal position due to the well managed macro economy. This has effectively been utilized to reduce government debts, something that has led to more fiscal freedom. The increase in revenue collection from both oil and non oil sectors have led to economic growth of 6.8% from 4.0% in 2010. There has been surplus in the revenue collection with the excess being used for funding development projects.

Despite the above achievements, a lot still needs to be done.  Unemployment of the Saudis is still high. Population growth has also led to the scarcity of housing with the few available and very expensive accommodation facilities that are not affordable for the common citizens. At present, the government is in the process of ensuring that more Saudis are employed within the private sector. Another concern when it comes to employment comes from the fact that the kind of training the Saudis get from their universities and colleges do not comply with the needs of the economy. This explains the fact why many foreign expatriates are the major players of the private sector. The government is working on the plan of establishing more universities and colleges that are market oriented to ensure that graduates are able to quickly and easily integrate into the market economy. King Abdulla is also working on the plan to empower women by establishing a women-only university. This has come after the realization of the contribution that women can bring to the economy.

Diversification still remains an important priority in the economy. It has realized that this would help to reduce over dependence on the oil revenue only. Whatever efforts that the government has put in place have already started bearing fruits. The revenue collected from non-oil sector in gradually increasing, a trend expected to continue. Strengthening this sector will ensure a stronger economy with more revenues being collected for development. Saudi Arabia is endowed with many other mineral resources besides oil. Only a few of these minerals have been exploited, while some are underway to being collected.

The government is also recommended to continue spending plans. This has enabled many development plans to be solely funded by the government. This commitment has been seen even in times when the economic crisis affected many economies. The budget has always undergone changes to ensure that all the important projects were adequately funded. There is however other concerns on the poor state of the government owned facilities. Improving these facilities will ensure that service delivery to the citizens is done efficiently to the benefit of all. Implementation of the ninth economic plan (2000-04) will greatly work to improve the economic growth. It is good news to know that Saudi Arabia government continued with its commitment for development despite the economic crisis that was experienced. The impressive growth of the economy from the last four decades is commendable. It is estimated that there has been an increase of about 72 times the original (The World Bank Group 2011).

A diversified Saudi Arabian economy would help to achieve balanced development across the country. As much as oil is the main economic supporter, it may get depleted one day without notice, thereby rendering the economy into crisis. Oil prices are also never certain as they are controlled by the international oil prices. This has been tested and it works. The government should ensure that this program is fully supported.

All in all, the Saudi Arabian economy has had an upward growth over a long period of time. This trend can be maintained if the necessary steps are taken to ensure that the economy is diversified. This will provide more employment opportunities for the younger generation. Development will also cease to concentrate at the oil terminals. Trade is also important as it opens up the market to more players. More of this needs to be done to ensure that the available products are diversified. Moreover, it should be noted that the majority of Saudis are still poor. There is the need of ensuring that poverty is eradicated. This can only be done when standard of living of everyone in the kingdom is improved. Import and export trade will be important into opening the Saudi market to those products like textile and other processed food materials that are not produced within the country at an affordable rate.

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