The availability of rich oil resources has brought untold affluence to Saudi Arabia; however, despite this, economic growth has been slow during much of the period since the 1980s.

From late 1973, there was a sharp rise in petroleum revenues which contributed to Saudi Arabia’s rise as one of the fastest growing economies in the world. At the height of the oil boom in the late 1970s and early 1980s, the average per capita income in Saudi Arabia was about $17,000. Trade surplus was the result and the government had abundant reserves to canalize into development and defense and in providing aid to other Arab countries.

However, the situation changed in the eighties, as rising oil prices led to a reduction in global oil consumption and the development of more oil fields around the globe. There was a worldwide glut in oil, which introduced an element of uncertainty into the oil economy.

Saudi oil production, which was about 10 million barrels a day dropped to about 3 million barrels a day by 1985, which contributed, along with low prices, to budgetary deficits in the Saudi economy. A relatively stable level of oil production since late 1980s, combined with fluctuating but relatively low oil export revenues, with a simultaneous growth in population impacted negatively on the Saudi budget, economy and its per capita income continued to decline, dropping to $11,000 in early 2000s, thereby lagging behind most Gulf countries.

But due to the increase in oil prices in recent times, the per capita income in Saudi Arabia has gradually increased, to reach $15,500 in 2006, still below the level reached in 1980 in real terms.

Over the past few years, Saudi government has introduced economic reforms that aimed to encourage more development in the private sector. Saudi Arabia has joined the WTO (World Trade Organization) in 2005, in order to enhance its trading, diversify its economy and attract a higher proportion of foreign investment. The government has also been spending larger amounts on infrastructure development, job training and education in view of the country’s heavy dependence on oil.

Natural Resources and the Economy

With continued growth in demand during the next 10 to 20 years, without the means to supplement the actual endowment in world oil resources, the result may be a steep and sudden decline in the supply of oil. Therefore, it appears that the recent rise in per capita income in Saudi Arabia may be in danger of a further downslide, as alternatives to oil resources will very likely to be developed within few decades. The measures taken by the Saudi government to improve infrastructure and other sectors of the economy are not considered fully enough.

Due to the abundance of the natural resource, like oil, the country’s economy becomes largely export centered; as a result such an export concentration is associated with poor management and performance of public institutions. Several studies that have utilized cross sectional data have shown the connection that exists between institutions and economic growth, such that weaker public institutions are associated with slower economic growth.

These studies have shown that the pace of economic development is generally higher in some nations largely due to the nature of the institutions that are in place, which focus upon the maintenance of strict law and order and the promotion of free enterprise. The governments in these countries have focused upon the development of a wide industrial base with due attention being paid to the development of adequate infrastructure for the development of industry and commerce. Since these are largely democratic institutions, there are free enterprises and market forces operating within these countries in conjunction with a well developed law and order system, which helps to facilitate economic growth.

The weakness of the institutions in Saudi Arabia may be one of the significant reasons for its decline in economic growth. Over the past decade, there has been a significant body of research which has suggested that the path of development that occurs within any country is largely shaped by the nature of its institutions.

There are researchers who examine the political economy of resource rich economies and points out that empirical evidence appears to suggest that countries which have a large share of their primary exports in GNP have records of bad growth and inequalities, especially when the quality of the institutions and the rule of law are bad. They also point out that such resource rich economies tend to squander away their natural resources and do not post high savings rates. In there analysis, they raise the interesting question of why certain countries with rich natural resources, such as Canada, Australia and Norway perform very well in terms of economic growth while other resource rich economies are not able to perform well despite their immense natural wealth.

Some argue that the reasons for such declines in economic growth may lie in the fact that an abundance of natural capital tends to crowd out investments in human capital, and the natural extension of this is a slowing down in economic development. It is believed that Saudi Arabia suffers from that phenomenon. Many people generate large non-wage incomes, which reduce the attention given to education, and give low values of obtaining higher skills needed for economic growth, thus, decrease quality of education.

Also, vast oil wealth availability may create a false sense of security and influence government to minimize the need for bureaucratic efficiency and growth-oriented economic policies and style of management. Such behavior is thought to exist in Saudi Arabia. I studied consumption patterns for Saudi Arabia and found that oil wealth had a significant effect on consumption, which is a strong indication of “confidence effect” of presence of natural resources.

Norway is a country that has shown a remarkable amount of growth in other sectors of its economy such as manufacturing, despite the fact that it has an abundance of oil exports. Therefore, Norway has diversified its economy and this has contributed to its economic growth, which is not solely dependant upon the vagaries of the oil market.

However, one of the more important reasons for the higher economic growth in Norway is the quality of its institutions - corruption is very low in Norway, as a result of which wealth earned by the country in terms of its exports are funneled back into channeling the country’s growth rather than being diverted to line the pockets of small groups.

It must also be noted that Saudi Arabia has made efforts to enhance technological improvements and to explore and develop new avenues and industries that could help to sustain the economy, but it seems that those efforts are not enough.

(Dr. Saleh Alsultan (saleh.alsultan@gmail.com) is a senior economist, specializing in macroeconomics and public finance.)