Abstract

This dissertation depends on the historical, methodological and integrative review of the literature to study the situation of Saudi Arabian economy. The issue in its economy is not the huge amount of it public treasury or the way to fund the development projects , but it is the primary dependence on the price of oil, and with the deterioration of these prices this economy faces the challenge of diversifying its sources. The oil and its derivatives have the highest percentage of the total country exports and imports from the public treasury. Saudi Arabia is still considered as a country of the third world although it is ranked as highest oil exporter and sits on a huge reserve.

The diversified economy is not a choice for Saudi Arabia, it is a mandatory step in order to assist the development strategies for the long-term period, and thus to secure the future for the generations. This step is the highest priority as it is appeared in the emerging market countries such as China, Brazil, India and Turkey that they are not oil exporters. They focus on the main driver: human being, they invested a lot on that to have a rapid growth and to enhance their Gross domestic product (GDP).

In this dissertation, the study covers the challenges and the opportunities for Saudi Arabian economy either for the current or forecasted and analyses them using certain strategy tools. In addition to that, it investigates deeply how it was planned and managed for the last decades and explores the ways to the transformation from the traditional economic model to the advanced model.

Table of Contents

Chapter 1: Introduction…………………………………………………………………………………………………….. 5

1.1 Economic Overview……………………………………………………………………………………………….. 5

1.2 Economy Characteristics…………………………………………………………………………………………. 6

1.3 Research Question…………………………………………………………………………………………………. 7

1.4 Dissertation Structure………………………………………………………………………………………………. 7

Chapter 2: Literature Review…………………………………………………………………………………………….. 8

2.1 Used Literature Reviews………………………………………………………………………………………….. 8

2.2 Implication of Economic Diversification in Revenue Stability……………………………………….. 8

2.3 Implication of Politics in Economic Diversification………………………………………………………. 9

2.4 The Economic Situation of Saudi Arabia……………………………………………………………………. 9

2.5 The Relationship between Natural Resources and Economic Diversification……………….. 10

Chapter 3: Research Methodology and Framework…………………………………………………………… 11

3.1 Research Approach………………………………………………………………………………………………. 11

3.2 Data Collection Methods………………………………………………………………………………………… 11

3.3 Data Analysis………………………………………………………………………………………………………… 11

Chapter 4: Interpreting Research Results and Findings………………………………………………………. 12

Chapter 5: Discussion…………………………………………………………………………………………………….. 13

5.1 General Findings…………………………………………………………………………………………………… 13

5.2 Recommendations………………………………………………………………………………………………… 13

5.3 Limitations…………………………………………………………………………………………………………….. 13

Bibliography…………………………………………………………………………………………………………………… 14

Appendix 1:………………………………………………………………………………………………………………… 17

It is very obvious that economic plays an important role for the countries stability in terms of securing a strong gross domestic production (GDP) and subsequently reinforcing their positions around the world. Therefore, it is the responsibility of governments to establish the bases plan and strategy for their economics. And not only that, it is their role to build up the policies in order to secure the interest in their economics and to accomplish internal and external balance in the financial conditions.
1.1 Economic Overview

In order to understand the economic diversification, it is necessary to know what is economic. There are several definitions of Economic that describe the meaning of economic. One of these definitions is how to allocate scarce or limited resources, with alternative uses, for the production of different goods and services in order to achieve the maximum possible to satisfy the wishes of the community and meet the multiple social needs (Mankiw, 2012).

Economic usually is categorized to three main systems: traditional system, market system and command system, and each of these systems has its own advantages and disadvantages according to business environments and the ways how they are applied (Mankiw, 2012).

Understanding these systems helps to find the optimum solution for the Saudi Arabian economy:

The traditional economy is defined as following the historical decisions or methods and considering answers for the what, how and for whom. The main advantage of this system is minimizing the resistance towards any decisions, but restricting people from freedom of innovation and therefore limiting economic growth and development is considered as a main disadvantage of this system (Tucker, 2013).
The market economy is a type of economic which deals with the relationship between supply and demand. It provides freedom of competition, innovation, choice and enhance the economy activities. However, instability is a disadvantages of this system because of the high availability of competition (Tucker, 2013).
The command economy is a type of economic where decisions are centralized. For example, North Korea, Cuba and in the past the Soviet Union. In such type of economy, the competition level is lower than the other system, but it reduces unemployment and inequality levels (Tucker, 2013).

Economy systems can be merged as the case for both of the command and the market economy and their marge produces what is called a mixed economy (Tucker, 2013).

The Term of economic diversification refers to set of changes that have been applied to a certain economy with the aim of exploring new market, new customer or even introducing new products (Villagra, 2005).
1.2 Economy Characteristics

The economics nature is very risky especially for governments, which necessitates them to seek balanced solutions. Therefore, diversifying the economics is a very important factor which can assist governments to achieve sustainable economics by eliminating or mitigating risks. It is well-knowledge that the industrialized countries did not get developed until they invested in the diversification as strategic choice for their economics (Dransfield, 2013).

For example, United States economy is the large economics in the world and the main reason behind that the diversity of its economy. It has more than many sectors such as: mining, finance and insurance ,real estate, manufacturing, wholesale trade, retail trade, transportation, information management of companies and enterprises ,utilities, construction, administrative, support, waste management and remediation service, educational services, health care and social assistance, arts, entertainment, and recreation, accommodation and food services, scientific, and technical services.

There are several advantages of economics diversification and on top of them is securing nations from internal diseases: poverty and unemployment. Moreover, it provides more stability for countries by increasing capita income accelerating their growth. For instance, the poverty measures in the late nineties dropped 55 per cent in Armenia and 64 percent in Azerbaijan since their economic diversifications achieved high records (Vos, 2011).

There is another type of economy which is the rentier economy that makes a majority of the population – if not all of them – depend on their governments for their income. In the Arab world, especially the oil-rich countries like Saudi Arabia, it is obvious that the governments rely on their income from external sources rather than individual productivity (Beblawi and Luciani, n.d.).

1.3 Research Question

How the Saudi Arabian economy will be more sustainable is the focus of this study. The critical questions will guide to more insight through this this literature research, which is: “What does happen after the oil runs out and what is the government plan?” In order to answer this question, this paper will concentrate on main points; economic diversification theories, history of Saudi Arabian economy, challenges and opportunities of its economy.
1.4 Dissertation Structure

This study is prepared with four chapters as the following: the first chapter is an introduction to the types of economic system, the second chapter is about the literature reviews have been presented for the Saudi Arabian’s economy, the third chapter is to present and explain the variables and key factors; also to explorer the critical questions, the fourth chapter is about interpreting research results and findings which helps to understand outcomes and chapter five is the final discussion about the whole dissertation including recombination, general findings and limitation.

This chapter gives a glance to the literature reviews used in this paper. Then in the next section it introduces the implication of economic diversification in revenue stability and its relationship. In addition to that, it shows the recent literature reviews of Saudi Arabian economy and what has been said regarding its economy.
2.1 Used Literature Reviews

The followed literature reviews in this dissertation are three types: historical, methodological and integrative. The reason behind why I used these literature reviews is to build a certain perception how was the Saudi Arabian economy planned and managed by through the historical review, then to understand wide variety of researches by using the methodological review, and finally to integrate both reviews: historical and methodological in order to achieve a new framework on the desideration subject by using the integrative review. Therefore, I think using this mixed literature reviews will be the right way to understand the Saudi Arabian economy and to give a clear image to what has been planned and executed.

This paper depended on many researches that managed by using several sources such as: EBSCO Discovery Service through the online library of University of Cumbria, Google Scholar, Heritage Foundation, International Monetary Fund (IMF), Central Department of Statistics and Information (CDSI), International Labor Organization (ILO), General Organization for Social Insurance (GOSI) and Ministry of Economy and Planning. Moreover, books were utilized from King Fahd library in Riyadh and some electronic versions were accessed through Amazon and Google online libraries.
2.2 Implication of Economic Diversification in Revenue Stability

Many of the recent literature reviews correspond that economic diversification is main factor in the revenue stability. As per Yan’s view that recently economic diversification is a widespread rule which results in increasing income sources and reducing the dependence on taxes in real states (Yan, 2012). She mentioned that stability and ability to predict revenue is income diversification (Yan, 2012). However, depending on limited sources of income may results in disarray in economy either in long-term business (Hendrick, 2002).

On the other hand, Carrol says in his study “Diversifying Municipal Government Revenue Structures: Fiscal Illusion or Instability?” that revenue diversification assists financial managers to work on diversifying the revenue structure in order to deal better with economic turns (Deborah, 2009). Also, he studied how revenue stability is influenced by economic diversification and he found in his investigation that there is a positive relationship between revenue stability and revenue volatility (Deborah, 2009).

In the study “Measuring the Effects of Economic Diversity on Growth and Stability” Steven Deller and John Wagner argue that economic diversification would help to consolidate the aims of economic growth, development, and as well to decrease the unemployment rates (Wagner and Deller, 1998). According to Kort’s argument in his study “Regional Economic Instability and Industrial Diversification in the U.S“, there is a proportional relationship between cities size, economic stability and economic diversification. He argues that the large cities tend to have more stability than the smaller cities.
2.3 Implication of Politics in Economic Diversification

Most of studies and researches concentrated on three factors in on order to identify opportunities for economic diversification, these factors are: geographic, economic, and demographic (Ahmadov, 2012). Several researches show that and in general the type of political regime plays an important role in economic diversification (Ahmadov, 2012). There is a study prepared by Cuberes and Jerzmanowski using the empirical literature which ended with the evidence that the governments that have democratic regime are less vulnerable to economic fluctuations and vis-versa in the regimes that have a lower level of democracy (Cuberes and Jerzmanowski, 2009).

In addition to that, there is another point of view by Aghion, Alesina and Trebbi which says that economic sectors are enhanced by democracy and political rights (Aghion, Alesina and Trebbi, 2007). Also, they mentioned in their argument that freedom is linked with political rights and this association plays an important role in economic development especially in technology sector (Aghion, Alesina and Trebbi, 2007). Democracy is very important for economic growth by reducing oligarchies giving opportunities to compete and eliminate monopoly (Acemoglu, 2008).

2.4 The Economic Situation of Saudi Arabia

Saudi Arabia is considered to be a state which has a mono-economy since its economy depends on exporting oil with more than 90 per cent of its export revenues and over 80 per cent of its export revenues (IMF, 2015). Oil plays a major role in the form of the Saudi Arabian economy, which makes the process of growth and development depends on only a single product. Therefore, International Monetary Fund mentioned – in its 2015 report subjected with: Saudi Arabia: Tackling Emerging Economic Challenges to Sustain Growth – that the Saudi Arabian economy dependence on oil revenues raises two major concerns. The first concern is how the government should manage its dependence on oil revenue as s single product and making sure that its economy is secured from volatility of oil prices in the global market. The second concern what the government should do towards diversifying its economy in order to decrease the reliance on oil revenues (Qu et al., 2015).

On the other hand, Saudi Arabian’s exports of non-oil represent around 10 per cent from the total export revenue. These exports are consist of plastics and rubber products, chemical industry products, transport equipment, ordinary metals, machinery and equipment, appliances, food & beverages, live animals, fabrics, papers and its derivatives, pearls, precious, stones metals and others goods. As Al-Qahtany’s argument which says the contribution of non-oil exports in Saudi Arabian’s economy is very low because of missing the opportunity to use the Arab free trade area agreement which provide 40 per cent discount of customs tariffs for the Arab products when entering any of Arab countries (Zaman et al., 2000).

In addition to that, he mentioned that there are internal and external obstacles that hinder the exports size. The internal obstacles such as shortages information about the international markets and their regulations procedures, high risk about finance and insurance because of local banks reluctance, high transportations cost; while the only external obstacle is high customs taxes for the countries that import from Saudi Arabia (Zaman et al., 2000).

Hegazy argues that the government of Saudi Arabia should concentrate on economic diversification because of many reasons. First, it helps to decrease the effects of the volatility of the global oil market. Second, it helps to reduce the unemployment percentage by creating jobs in the private sector which absorbs the population of working age from young and growing labor force. Third, it is considered as main factor for increasing productivity and sustainable growth. Finally, it helps to develop the non-oil economy many years when oil revenues begin to wane (Qu et al., 2015). Also, Hegazy mentioned that government of Saudi Arabia should concentrate on the developing the growth and productivity taking in consideration the priority of education, business climate, Labor market reforms, Development of SMEs and public investments in infrastructure (Qu et al., 2015).

At the beginning of the last decade, some studies such as Makdisi, Fattah and Limam (2006), and Alheirka and Hamad (2001), that concentrated on three engines of economic growth in the Middle East and North African countries (MENA). The first is the capital accumulation and increasing in the labor force, the second is the technological development and the third is efficient use of resources. These studies have found that the contribution of technology and qualification in the GDP was negative, and concluded that the negative result of the production factors in the countries of the region reflect a real weakness in the optimal use of production factors. Moreover, they found that the growth of the GDP in oil-exporting countries was mainly the result of the accumulation of capital and increase the number of employees (Makdisi, Fattah and Limam, 2006).

Sadiq in his study about the social policy from economic perspective indicates that the pattern of growth in the Gulf Cooperation Council (GCC) is mainly linked to the business growth, which relied on the influx of foreign labors and most of them are unqualified. The study argues that the proportion of foreign labor in the GCC labor market has reached its limit and can not continue increasing in the foreign labors without being exposed to the economic and social entities to serious risks ().
2.5 Natural Resources Role in Economic Diversification

“Natural resources have contributed to advancing economic development worldwide”, Ali Al-Naimi, the kingdom’s oil minister, said on November 23, 2015. Most of the recent studies argue that the countries that have abundant natural resources usually have a bad economic performance than countries that do not enjoy such huge resources equally. However, this situation does not include all the countries that have the same level of the natural resources abundance; there are some of these countries is characterized by economic performance better than other countries such Indonesia which relies on oil and Botswana diamond-rich. However, but in many cases be an abundance of resources one of the major determinants of economic failure in these countries, cases of failure to achieve development in the petroleum Exporting Countries and other resources are considered many.

The weak and disappointing economic performance for the natural resource-rich countries makes the way to understand is puzzling when it is compared to some poor countries. In the sixteenth century, cities such as London, Geneva and Amsterdam were the most important economic cities in the world although they were industrial cities specialized in textile manufacturing and did not have an abundance of natural resources, unlike other cities such as Lisbon and Madrid and that even though they were receiving large inflows of gold bullion and silver from its colonies but they were not global economic cities (Stone and Stone, 1987). Also, the same phenomenon is repeated at the end of the twentieth century and the beginning of the twenty first century, countries such as Japan and South East Asian countries (South Korea, Taiwan, Hong Kong, and Singapore) do not have an abundance of natural resources, but the strength of their economies and diversity beyond tsarist Russia’s economy, and the economies of other countries classified as one of the richest countries in terms of availability on the important oil riches like most countries in Africa and the Middle East and Latin America ().

Recently, several economic studies have shown that there is a direct negative relationship between the natural resources abundance and the economic growth and on top of these studies is Sachs’s and Warner’s study. They discovered in their study that the economies that had a large proportion of natural resources exports from the total domestic exports to the gross domestic product (GDP) in 1971 were going to achieve low rates of economic growth in the period 1971 – 1989 (Sachs and Warner, 1995). This argument is supported by other economic researchers such as Gylfason, Herbertsson and Zoega who assert that there is a direct negative relationship between the natural resources abundance and the economic growth (Gylfason, Herbertsson and Zoega, 1999).

The economists have shown some analysis to explain the secret behind this weak economic performance for some of the abundant natural resources countries; these explanations are different due to their nature either economical or institutional that relative to the political economy for these countries. The economical explanations are following:

Procyclical Fiscal Policy

It is one of the explanations that addresses the financial situations for the countries that depend mostly on the oil exports especially in the Arabian Gulf. The economic instability is associated with the weak development. It does not greatly affect only at the level of well-being in developing countries; it more frequently occurs in developing countries than in rich countries. Recent study provided by Alesina and Tabellini has an argument that the procyclical fiscal policy widely exists in the countries that have more corruption (Alesina and Tabellini, 2005).

Oil Price Volatility

Oil is still considered as a main source of the energy and the world economy as well. The economy in the oil- dependent countries is counted on the oil revenue, so any changes in its prices will affect the economic and development growth, thus their wealth will be affected (Ploeg, 2011).

Dutch Disease Theory

Dutch disease is not a disease in the conventional sense, as it is an economic phenomenon that occurs in the state as a result of certain economic developments consequent rise in its currency value, and then the international competitiveness dropped her, or resources where the shift from the production of goods that were produced and issued by the state of the Conventional toward other sectors, and called the disease due to the affected local production of exports or goods trade negatively as a result of these changes, but most uses of the term is the situation in which they are given a natural resource such as oil or gas discovery, which result in the decline of other traditional exports negatively as a result.

Additionally, Murshed argues that the Countries that rely on its economy based on natural resources are more likely to become a rentier economy and thus be closer to what is called the natural resources curse (Murshed, 2004).
2.6 Challenges of the Economic Growth in Saudi Arabia

Hasan argues that the GCC countries are facing several critical challenges such the erosion of oil revenues, the absence of democratic and, the accumulation of fiscal surpluses in sovereign funds absence of transparency, the inflation of the public sector and administrative organs, the bulk of public spending on social services goes to the foreign labors, increased rates of unemployment and poverty, and finally the inflation of the security organs and the dominance of the government on the economic activities. All of these challenges necessitate them to reconsider their economic policies (). The recent report issued by IMF mentions that the high growth in the young population is considered as an important challenge since it requires very high levels of education in order to prepare them to the markets (IMF, 2015).

3.1 Chapter Overview

Since this dissertation is about an economic subject, then it needs several sources of data and information. In order to understand the Saudi Arabian economy in a more applied manner, I suggested that it might be useful firstly to start with exploring the history of its economy by understanding the previous policy and its economic philosophy, then to focus on the political side – especially the foreign policy – since I believe the Saudi government depends on oil revenue for its foreign policy. Also, in such study of economic history several techniques are essential, such as identification of quantitative and qualitative assessments that help to find common factors that support the concept of economic diversification. The quantitative method requires collecting data, analyzing, interpretation and finalizing the study by writing a report; while the qualitative seeks to understand unquantifiable information, such as a case study of human problem, by collecting data from certain questions, analyzing them to a general perception and finally building an interpretation from the data and its figure (Creswell, 2014). The combination method between quantitative and qualitative assessments would help to understand a research issue more effectively than a single approach (Creswell, 2014).
3.2 Research Approach

My argument in this paper is based on the combination method because of using quantitative method which can help to analysis hypotheses and to explore the relationship between variables; also using qualitative method which can help to give visual pictures about the research by constructivist perspectives. My approach in the part of the quantitative research is to cover several aspects such as oil production, statistic of exports and imports, investments, natural resources, financial market, and government subsidy; then try to generalize results from that research and finally to predict a certain perception. In contrast, for the other part I sought the previous economics and strategic plans that have been made by government and to analyze its assumptions, beliefs, expectations, and theories that supports these plans. In addition to that, I suggested to use some strategic techniques such Political, Economic, Social and Technological factors (PETS) tool to analysis the Saudi Arabian economy. It might help in this subject to evaluate and visualize opportunities and threats (Thompson and Martin, 2005).
3.3 Data Collection Methods

Data are considered as the core of any research, especially economic researches that based on the language of figures. All researchers look for data in order to help them to find answers for the research questions and to get a solution for achievements for their researches. Economic Researches are as the same of the other scientific researches since all of them examine and analyzes of human behavior on the individual and community level (Pawar, 2004). According to their research subjects, the researchers need to address what type of data they need and can collect that can help them for their research objectives. Not only that, they should seek how these data will be collected (Lowe and Zemliansky, 2010).

Mostly, data collection consume time, effort and money. Because of that, researchers should select the optimum ways of their data collection methodology. Based on the study “Introduction to Primary Research: Observations, Surveys, and Interviews” prepared by Dana Driscoll, she mentioned that observation as a very important methodology of any primary research. Observation is a basic step for the qualitative research method which help to explore and examine behaviors and settings. It supports researchers by providing them the ability to collect data in several interactions and behaviors and as well to evaluate them. Also, it provides them to build a certain perspective and hypotheses that are generated from data collection. They should spend more effort on observations in order to add a particular role in the setting; however they should spend efforts in a unified manner. Observation is not only a visual accomplishment; it can be accomplished by other senses. Researchers can utilize their auditing skills and sense to explore deeply and provide insightful perspective (Marshall and Rossman, 2016).

In economic researches, researchers need to seek through statistic reports to assess their research issues and problems and to do that they should collect data in a standardized format. However, they need understand the collected statistical data by using some analysis techniques.
3.4 Data Analysis

The data analysis is one of the most important stages in the academic researches especially the scientific studies. Researchers in this stage follow certain techniques and skills to seek answers for their research questions. In their later study, Gill and Johnson (2010) argue that human beings have the ability to realize the meaning of the phenomena and events that encompassed them; and “the researcher does not begin a project with a preconceived theory in mind” which is the brief of the Grounded Theory (Strauss and Corbin, 1998). It is developed by Glaser and Strauss and it essentially focus on how to generate and detect a theory about a phenomenon belongs to a certain event. However, Strauss and Corbin (1998) mentioned that the Grounded Theory is also consisted of empirical evidences of collecting and analyzing data and building theoretical frameworks that explain the collected data (Strauss and Corbin, 1998). Glaser draw up a list of four characteristics in the Grounded Theory: a) a theory must meet the needs, b) it has to be relevant to the required data, c) it must have the ability to work, and d) it must has the ability to be modifiable (Glaser and Strauss, 1973).

Researchers should present their findings and research’s results as it is very important step to show their literate and evidence for their findings. This chapter discusses my research findings and results.
4.1 The Structure of the Saudi Arabian Economy

In order to understand how the Saudi Arabian Economy is formed, I suggested to explore very important aspects: the natural resources, the gross domestic product (GDP), Non-Oil investments, Health and Education, financial market, labor market, tourism, political situation and finally laws and regulations.

4.1.1 The Natural Resources

Saudi Arabia has a very strategic geographical location since it is located in the south-west of the continent of Asia. It occupies the big bulk of the Arabian Peninsula; and also it is located in between the three continents: Asia, Africa and Europe. In addition to that, it is characterized by the existence of the Two Holy Mosques that are considered as destinations for all Muslims around the world.

Oil Production

Saudi Arabia has the most important element of natural resources, which oil and it is considered as the most important and largest oil country in the world in terms of reserves of oil, production, exports and refining capacity. It has proven crude oil reserves with amount of 266,578 million barrels which means that it can continue producing around 75 years with amount of 9.7127 million barrels per day. Saudi Arabia has been able to raise production capacity in the period 2000-2014 from 8.094 to 9.712 million barrels per day as shown in figure (OPEC, 2015). This huge capacity was a result of the high global demand in that period which was a direction reason for the positive affect on its annual budgets.

Contribution of oil revenues in the GDP represents around 39.1% in the fiscal year 2014 and 46.13% on average for the past decade. This enormous proportion makes the economy more vulnerable to volatility since the oil prices are not stable. However, determining oil prices are influenced by many different factors that makes several specialists who consider oil as a commodity which is not only subject to the forces of supply and demand since the production increases sometimes, but the price remains constant, and the price increases and remains constant demand and so on. Siham argues that there are several factors drive oil prices and these factors are either political, economic, production, environmental or financial. All of th