Hello, hedge_fund-ga!
The following articles provide some good insight into the Saudi
economy, the need to diversify from the dependence on oil, and
existing barriers and suggestions for encouraging diversification in
the private sector. The Saudi government has, throughout the years,
instituted a series of 5-year development plans to create a more
diversified economy. If the Saudi government follows a policy of
supporting and funding diversification, and foreign investors regain
confidence in the Saudi economy, there is certainly good potential for
continued and future success. Membership in the World Trade
Organization is also seen as an essential step toward attracting
investment.
The first articles provide some basic background on the state of the
Saudi economy. I have chosen to follow with two, in-depth articles
that highlight the potential barriers to diversification and the steps
which are being taken to move in the right direction. I have concluded
with some references that highlight current diversification projects.
These references should provide you with specific information geared
toward writing a succinct paper on the topic of diversification in the
Saudi private sector.
============
BACKGROUND
============
Before getting into the more technical articles, I have provided links
to a few simple overviews of the Saudi economy so you have a bit of
background. If you read through these general articles, the two
references I have posted further on in my answer will not prove so
overwhelming!
From "Economy of Saudi Arabia." Wikipedia
http://en.wikipedia.org/wiki/Economy_of_Saudi_Arabia
* This article touches on a few of the past and current attempts to
increase private enterprise and encourage diversification:
"Through 5-year development plans, the government has sought to
allocate its petroleum income to transform its relatively undeveloped,
oil-based economy into that of a modern industrial state while
maintaining the kingdom's traditional Islamic values and customs.
Although economic planners have not achieved all their goals, the
economy has progressed rapidly."
"Saudi Arabia's first two development plans, covering the 1970s,
emphasized infrastructure...For the third plan (1980-85), the emphasis
changed. Spending on infrastructure declined, but it rose markedly on
education, health, and social services....In the fourth plan
(1985-90), the country's basic infrastructure was viewed as largely
complete, but education and training remained areas of concern.
Private enterprise was encouraged, and foreign investment in the form
of joint ventures with Saudi public and private companies was
welcomed. The private sector became more important, rising to 70% of
non-oil GDP by 1987. While still concentrated in trade and commerce,
private investment increased in industry, agriculture, banking, and
construction companies. These private investments were supported by
generous government financing and incentive programs. The objective
was for the private sector to have 70% to 80% ownership in most joint
venture enterprises."
"The fifth plan (1990-95) emphasized consolidation of the country's
defenses; improved and more efficient government social services;
regional development; and, most importantly, creating greater
private-sector employment opportunities for Saudis by reducing the
number of foreign workers."
"The sixth plan (1996-2000) focused on lowering the cost of government
services without cutting them and sought to expand educational
training programs. The plan called for reducing the kingdom's
dependence on the petroleum sector by diversifying economic activity,
particularly in the private sector, with special emphasis on industry
and agriculture. It also continued the effort to "Saudiize" the labor
force."
"The seventh plan (2000-2004) focuses more on economic diversification
and a greater role of the private sector in the Saudi economy. For the
period 2000-2004, the Saudi Government aims at an average GDP growth
rate of 3.16% each year, with projected growths of 5.04% for the
private sector and 4.01% for the non-oil sector. The government also
has set a target of creating 817,300 new jobs for Saudi nationals."
==
Also read "What is the current state of the Saudi economy?" FAQ's.
Saudi-American Forum.
http://www.saudi-american-forum.org/FAQs/advresFAQsBusinessEconomy.htm
======================================================================
BARRIERS TO AND SUGGESTIONS FOR DIVERSIFICATION IN THE PRIVATE SECTOR
======================================================================
The next two articles should provide you with most of the information
you need for the "meat" of your paper.
The first article outlines the past and present state of the Saudi
economy and the various percentages of contribution between oil and
the non-oil public and private sector, along with some basic overviews
of barriers that must be overcome if the private sector is to thrive.
The second article delves into more of the issues involving
development and diversification within the private sector and how the
government can help to promote private economic ventures.
Both articles are fairly technical, so don't let them overwhelm you.
Simply read them slowly in order to form a basic understanding of the
problem, and then pull out the key points that are relevant to your
thesis.
I have excerpted some pertinent paragraphs to help you in the
process, but you will still need to spend some time reading the
articles and concentrating on the entire text so you can make sense
out of the portions I have highlighted below.
==
From "Can Saudi Arabia Reform its Economy in Time to Head Off
Disaster?" by Robert Looney. Strategic Insights, Volume III, Issue 1
(January 2004)
http://www.ccc.nps.navy.mil/si/2004/jan/looneyJan04.asp
The deteriorating economy in Saudi Arabia has been accompanied by an
increase in crime, poverty and unemployment. The non-oil sector has
been unable to sustain a high rate of growth. The article highlights
some barriers that must be overcome to encourage privatization and
diversification in order to counter these economic trends.
Excerpts:
"To counter these trends, Crown Prince Abdullah, the kingdom's
de-facto leader, has announced plans for sweeping reforms including
privatization, liberalization and diversification of the economy.
However, implementing them will not be easy. Conservative opposition
within the ruling family is strong and limits the pace of reform.
Barring major reforms, the financial cost of state-lead economic
diversification may reach upwards of U.S. $100 billion over the next
twenty years. And the country's national debt is already over 100
percent of GDP. Even with an improved oil picture, the Saudi
government may simply not be able to finance the diversification of
the economy without extensive private sector participation."
"On the other hand, the international scene provides no quick fixes
either; and bringing in private foreign investors is not without its
own problems. The increased presence of foreign businessmen will
further strain relations between the government and the kingdom's more
traditional groups. The Saudi government also has to convince the
foreign investment community that the kingdom is a secure place to do
business, and not a battleground between the royal family-dominated
government and international terrorists."
"Saudi Arabia's problems have been decades in the making and certainly
will not be solved quickly. This essay identifies the main factors
responsible for Saudi Arabia's economic deterioration. Have
fundamental changes taken place in the economy, perhaps since 1980, to
cause the decline in non-oil economic growth? If so, what are they?
And what are their implications for the future?"
.....
Some further points (under "Key economic linkages):
"For example, private sector investment is likely to be stimulated
with an oil boom-led expansion of public infrastructure investment.
But is it dependent on ongoing government investment, or could it be
sustained by non-public induced investment opportunities? Have these
patterns changed over time? Resolving issues of this type is a
critical first step in designing a reform strategy for the country."
..
(Under "Assessment")
"Sooner or later, government expenditures will have to be refocused on
activities that directly support private sector investment.."
===
From "Development Strategies for Saudi Arabia: Escaping the Rentier
State Syndrome," by Robert Looney. Strategic Insights, Volume III,
Issue 3 (March 2004)
http://www.ccc.nps.navy.mil/si/2004/mar/looneyMar04.asp
Introduction:
"No doubt the boom and bust cycle that has characterized Saudi Arabian
economic growth since 1973/74 has been an additional factor underlying
the kingdom's poor job creation record. Oil revenues, representing
85-90 and 75-80 percent of total exports and budgetary receipts
respectively, are both volatile and insufficient for funding
development projects needed to stimulate needed levels of private
sector investment."
.....
"Developing a dynamic private sector is critical because much of the
slow down in employment and non-oil growth has stemmed from the
decline over time in the government's ability, simply through its own
expenditures, to stimulate private sector output and expenditure. In
addition, the Kingdom's current approach to employment creation, the
Saudization program, while well intended has a somewhat limited
potential to make a significant contribution to the country's
employment needs."
"The sections below contend that the keys to revitalizing the non-oil
economy are diversification, modernization, and increased
competitiveness across the whole spectrum of private establishments.
To complement progress in these areas, development strategies are
suggested that are likely to further enhance the kingdom's employment
creation potential through shifting resources towards those sectors
with the highest job creation potential."
Reoriented Development Strategies
-----------------------------------
"The oil/gas sector and the petrochemical industry continue to
dominate the economy in general and the manufacturing sector in
particular. This phenomenon can be characterized as a single-track
development strategy, with focus on the modern-export oriented segment
of the economy."
"Diversification in non-hydrocarbon industrial activities has started
but is still relatively modest, with a strong concentration in food,
textile, furniture and household appliances. Since the
oil/gas/hydrocarbon sectors are largely capital intensive, they are
not a dynamic source of jobs, at least of the magnitudes currently
needed. Stronger diversification into more labor intensive activities
is needed and should proceed based on the exploitation of comparative
advantages such as location and natural resources. Here, small and
medium sized firms, often neglected or overlooked in the past, can
play a leading role in solving the kingdom's employment problems."
Encouraging the growth of Small and Medium Enterprise
------------------------------------------------------
Read further about the potential for diversification by encouraging
SME's (small-and-medium-sized enterprises):
"In Saudi Arabia's case, SMEs have the potential to play a variety of
important roles: (a) selling their own products, usually finished
goods, (b) acting as either subcontractors for or (c) suppliers of raw
materials for larger multinational enterprises. There are several
great success stories in creating a large number of jobs and
relatively low costs. For example, the information technology (IT) job
market is booming in Saudi Arabia, many positions filled by Saudis
working for SMEs. Currently, SMEs in Saudi Arabia represent almost 93
percent of total enterprises and account for about 24.7 percent of
total employment."
The article goes on to discuss some of the barriers to developing SMEs, including:
Lack of credit/finance/capital
Dependence on foreign resources
Access to technology
Limited marketing skills
Bureaucratic hindrances
Limited information on possible markets and clients
** Suggestions follow for initiatives that the Saudi government can
implement to help SME's in their development (see article)
A return to a policy of "Unbalanced Growth"
---------------------------------------------
"Saudi Arabia's development strategy has changed considerably over the
years. Initially, after the 1973/74 sudden increase in oil prices and
vastly expanded revenues, the government pursued what is often
referred to in the literature as unbalanced growth.[28] This
particular strategy entails investment in social overhead (mainly
infrastructure) investments. The projects were attractive to the
authorities since they used imported labor, raw materials and
management. In addition they were highly visible."
"The theory underlying this strategy is that it would minimize the
amount of decision making needed in the private sector. Massive
infrastructure investments, by making profitable investment
opportunities readily apparent, would induce the private sector to
greatly step up its investment."
...
"Clearly, a return to the unbalanced growth development strategy of
the 1970s and early 1980s would expand private sector investment and
growth to the point where significant improvements in job creation
would be sustainable. It would also create, through increased
investment profitability, opportunities to nurture and develop the
kingdom's stock of entrepreneurs."
"The financial costs of this strategy are staggering, however. If the
country's population continues to expand as projected, the kingdom
will be home to 38.5 million people by 2023. The government has
concluded that to effectively respond to the country's infrastructure
needs will necessitate the mobilization of investments worth SR1,000
billion in the coming twenty years, suggesting a yearly average of
SR50 billion. This includes investments of around SR438 billion in the
power sector, capital needs of SR340 billion for building water and
sewage projects, around SR100 billion for the gas initiative, and the
remaining funds of SR122 billion for projects in the areas of
telecommunication, roads, airports and related transportation
systems."
"Financing this level of expenditures is possible, but it will require
several initiatives...
(Read further to see the list of initiatives)
** While this article goes into even greater depths, you may choose to
simply concentrate on the sectors of private diversification
highlighted above for purposes of your paper! Otherwise, it may get
too overwhelming.
======
Lack of Skilled Workforce:
The lack of skilled workers within Saudi Arabia has been seen as
another major barrier to diversification.
From "The Saudi Paradox," by Ian Bremmer. World Policy Journal. Volume
XXI, No 3, Fall 2004.
http://www.worldpolicy.org/journal/articles/wpj04-3/Bremmer.html
"The exodus of skilled foreign workers exacerbates the lack of
diversification in the Saudi economy. Saudis are not commonly trained
to manage the high-skill sectors outside of oil production, and
foreign workers are routinely hired to handle the foreign technology
on which so much of the economy depends. Speaking at an energy
conference in Washington in December 2003, the Saudi minister of
petroleum and mineral resources, Ali al-Naimi, declared that the
government intended "to expand and diversify the Saudi economy; and to
create new jobs for a growing population." But Saudi ministers have
been saying virtually the same thing for years, and progress toward
real diversification, along with job creation to combat high
unemployment, is not happening nearly quickly enough."
"To address these problems, Crown Prince Abdullah (Saudi Arabia?s
effective sovereign, given the precarious health of King Fahd) has
announced ambitious reform plans that include privatization,
liberalization, and diversification of the economy. However,
conservative opposition within the ruling family is strong and limits
the pace of reform...."
===========================================
RECENT ARTICLES CONCERNING DIVERSIFICATION
===========================================
From "Industrial diversification lifts off in Saudi Arabia." Aug. 11, 2005
http://www.ameinfo.com/65654.html
"Plans have recently been outlined to increase the number of specially
developed areas dedicated to industrial and manufacturing undertakings
from 14 to 24. This is seen as necessary to widen the nation's
industrial base through provision of more sites, promoting more
foreign investment and encouraging the start up of technology-based
enterprises."
Read further...
==
From "Saudi Arabia's $35 billion construction boom." Oct 2, 2005
http://www.ameinfo.com/69083.html
"The changing skyline along Jeddah's cornice and in Riyadh with its
landmark 70-storey Al-Faisaliah tower are witness to the acceleration
in construction activity throughout the Kingdom in recent years. More
than $1 billion of hotel and office building projects in Riyadh alone
are being developed."
"In total, current infrastructure and public sector building
programmes are valued at some $35 billion. Plans include building 600
new factories, schools, doubling desalination capacity, increasing
electrical generation and distribution. Some 600,000 new homes are to
be built in the next four years with many more planned."
==
From "WTO set to boost foreign direct investment into Saudi Arabia."
Sept. 22, 2005. http://www.ameinfo.com/68270.html
"Saudi Arabia is increasing efforts to improve its competitive edge as
it prepares to join the World Trade Organisation and open up its
markets to international competition."
"The Kingdom took its giant step towards joining the organisation
following a key trade agreement signed with the US on September 9.
Saudi Arabia is in the course of concluding trade pacts with all the
WTO members and has so far concluded 38 such agreements. The agreement
with Washington though is considered a 'decisive' move."
"Observers believe that Saudi accession to the WTO will act as a
confidence boost to potential investors since it consolidates a
process and framework of economic modernisation that can be built upon
in the long term."
OPINION
========
Rodrigo de Rato, Managing Director of the International Monetary Fund,
had this opinion about Saudi Arabia's progress toward diversifying the
private economic sector after a recent visit:
http://www.harolddoan.com/modules.php?name=News&file=article&sid=6497
"On the domestic front, the consistent implementation of structural
reforms over the past several years has coalesced into a driving force
for economic diversification and private sector-led growth, thus
creating the basis for increasing employment opportunities for Saudi
nationals and enhancing the economy's resilience to oil price shocks.
I am confident that the authorities will maintain and, when possible,
accelerate the implementation of structural reforms to face emerging
domestic challenges, including the need to create employment for a
fast growing labor force.
"In my discussions, I commended the Saudi authorities for their
decisions to utilize a large part of the fiscal surpluses generated in
2004 and 2005 for undertaking large investment plans to improve Saudi
Arabia's much needed physical infrastructure, health care and
education systems, and to improve social welfare and municipal
services. This investment program will contribute positively to the
expansion of private sector activity and economic
diversification......At the same time, the use of fiscal surpluses for
further reducing government to around 25 percent of GDP by 2006 will
enhance private sector confidence..."
Read "Rodrigo de Rato's Statement at the Conclusion of his Visit to
Saudi Arabia." Press Release - International Monetary Fund. Oct. 18
2005
http://www.harolddoan.com/modules.php?name=News&file=article&sid=6497
===
I am sure you will do a great job on your paper if you patiently read
through the references I have compiled and compile the pertinent
points into your own framework.
Sincerely,
umiat
Search Strategy
private diversification AND Saudi Arabia
how can Saudi Arabia diversify?
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barriers to private sector diversification in Saudi Arabia
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