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Volume 6, Issue 1, February Issue - 2018, Pages:142-149


Authors: Mohammad H. Al-Qunaibet, Khalid Nahar Alrwis, Adel M. Ghamen, Sharaf Aldin Bakri Ahamad,Nageeb Mohammed Aldawdahi
Abstract: The study measures the structural changes brought in Saudi Arabia by virtue of its economic development plans in order to expand the productive base of the economy. This study, in achieving its objectives regarding standard economic analysis, made use of secondary data issued by the Saudi Arabian Monetary Agency. In the study results, the values of the Spearman and Kendall rank correlation coefficients were both positive and statistically significant; this suggests that the structural changes that took place in the Saudi economy during the execution of development plans were not substantial. It was found that during the study period, the private sector in that country accounted for 46.3% of all fixed capital, followed by the public sector (32%) and the oil sector (10%). The investment multiplier indicates a SAR1 million increase in fixed investment, which in turn led to increased contributions to the Saudi gross domestic product by the oil sector and the private and government sectors. Under the even redistribution in 2014 of fixed investment among the economic sectors, the oil sector is thought to have contributed 66.7% of the resulting estimated income of SAR 5,096.06 billion, followed by the government sector (20.9%) and the private sector (12.5%). Finally, the study results suggest that there is a need to expand the productive base by taking the following actions :  (i) increasing the investment multiplier in the private sector, through the localization of technology and increasing both production and productivity, and (ii) forwarding investments in (and mobilizing resources toward) productive nonoil sectors in the Kingdom of Saudi Arabia.
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1 Introduction

The Saudi economy has undertaken successive development plans, each of which has been based on crude oil and natural gas production. The national production of oil and gas is sine qua none for the development of the country, and their relative importance is fully recognized since 1981. Although these two contributing nearly 57 percent in the total production of the economy. The production of oil and natural gas declined 44.7 percent in 2013; however the relative importance of manufacturing increased from 4.8% in 1981 to 10.1% in 2013. Saudi Arabia’s economy is still quite outwards-looking in terms of inputs and outputs. The increased imports are playing an important role in the supply of goods and services; is favorable for the economic development of the country. Petroleum exports naturally play an important and influential role in steering the economy, however in recent years, crude oil prices declined from USD110.30/barrel in 2012 to USD58.80/barrel in May 2015. The obligation of Saudi Arabia’s OPEC commitments, oil exports are expected to decrease, inevitably impacting state economy.  Thus it seems imperative to expand its productive base through non oil sector for future development plans and increase relative share in the gross domestic product (GDP).

Some studies address economic diversification and its impact on growth and development. Ghanem & Fawaz (1998) address specific allocations of economic and agricultural resources in light of structural changes in factors within the Egyptian economy. That study showed that those structural changes were not substantial, as they acted as catalysts for growth and development; indeed, between 1976 and 1997, those changes worked in favor of Egypt’s least-productive sectors. Hiti (2003) discusses the success of the Gulf Cooperation Council (GCC) in applying economic diversification policies so as to support continuing economic and structural changes, and thus accelerate both the privatization process and the processes of increasing economic cooperation and attracting foreign direct investment. Ling et al. (2005) address the degree of industrial diversity within Taiwan, and its impact on the productivity growth of the electronics industry there. They found that the degree of diversity in the country’s electronics industry is much higher than that estimated for its manufacturing industries.

Goran (2013) explains that the diversification process must take into account competitiveness, innovation, and overall development. The oil sector still plays a prominent role in the economies of GCC countries, where between 2005 and 2011 the oil sector contributed about 45.6% of GDP, about 83.9% of the total value of exports, and approximately 84.2% of all government revenues. Mrzuk (2013) studied economic diversification in GCC countries, and found that they have not achieved acceptable diversity levels, relative to other rentier states. Economic diversification can be achieved through the implementation of a package of long-term policies that ensure the gradual transition from a focus on oil to economic diversification.

Aayasrh (2014) calculates the industrial diversification coefficient in Jordan. That study showed that there were differences in the degree of industrial diversity among Jordan’s provinces. It recommends encouraging investment in growth-stimulating sectors, and introducing the principle of industrial diversity in the design and planning of long and short-term industrial policy. Finally, Khatib (2014) studied the impact of diversification on growth in the Saudi economy in the 1970–2011period. That study showed that, in spite of increasing the degree of diversification vis-à-vis productive activities, the rate of change in the diversification of imports and exports and in government revenues remained very weak. Additionally, having not achieved the goal of diversifying its productive base—where oil exports account for the bulk of all merchandise exports—government revenues continued to be quite dependent on oil revenues.

It is clear that there is a dearth of research on the extent of substantial structural changes in the Saudi economy, and that previous studies have not addressed the means of expanding that country’s productive base in a standardized way. The current study examines the structural changes in the Saudi economy, and how it can expand its productive base; it does so, by undertaking the four objectives viz., (i) Measuring structural changes in the Saudi economy in terms of its economic development plans, (ii) Studying the current state of investment distribution and GDP among various economic sectors, (iii) Estimating the investment multiplier of various economic sectors and (iv) Studying the redirection of fixed investment and its effect on Saudi Arabia’s production base. 

2 Materials and Methods

The study achieves its econometric analysis objectives by taking two different routes, as explained below.

Spearman and Kendall rank correlation coefficients were used to evaluate structural changes in the Saudi economy as successive development plans were made. The Spearman rank correlation coefficient (rs ) was calculated by using the following equation (Bachioua, 2011):

rs=1-6 Σdi2÷N(N-1) ,

Where di2 represents the difference between the two symmetrical ranks, and N represents the number of notes (i.e., subsectors). The significance of the Spearman rank correlation coefficients was also tested, using the t-test as follows:

t=rsN-21-rs2.

The Kendall rank correlation coefficient (π) was calculated by using the following equation (Kendall, 1955):

π=1-4Qnn-1=4Pnn-1-1,

P= ΣpiQ= Σ qi

Where P represents the number of matching pairs, Q represents the number of nonidentical pairs, pi  represents the numbers successive to R (yi ) that are greater than R (yi ), and qi  represents the number of ranks successive to R (yi ) that are smaller than R (yi ). The significance of the Kendall rank correlation coefficients was also tested, using a distribution (Z) as follows:

Z= π÷2(2N+5)9N(N-1).

 

Table 1 Relative share of various sectors in the Saudi gross domestic product (%),across various economic development plans

Sector

Economic development plans

First

Second

Third

Fourth

Fifth

Sixth

Seventh

Eighth

Ninth

Agricultural

2.68

1.13

1.70

5.39

5.79

5.70

4.72

2.82

1.98

Crude oil, natural gas, and oil refining

56.98

55.23

46.94

23.52

 

REFERENCES

 

Aayasrh TAM (2014) Industrial diversification in Jordan: his account and patterns. Jordan Journal of Economics Science 1: 109-125.

Abdel-Kader MAQ (1990) Methods of measuring economic relations with computer mail applications, Dar Egyptian Universities, Alexandria, Egypt.

Bachioua LA (2011) Fundamentals of Statistics Concepts and Application:An Arabic Text, First Edition, Phillips Publishing, Hafner Publishing Co.

Ghanem AMK, Fawaz MM (1998) Factors affecting the
allocation of economic and agricultural resources in Egypt in light of structural change, Seventh Conference of Agricultural Development Research, Faculty of Agriculture, Ain Shams University, Cairo, December 15–17, 1998. Annals of Agricultural Sciences 2: 505-537.

Goran A (2013) Economic diversification in the Gulf Cooperation Council (GCC). Journal of Industrial cooperation in the Persian Gulf, 105: 24-28.

Hiti NAR (2003) Economic diversification of the Gulf, the newspaper today, No. 11033, August 30, p. 3.

Kendall MG (1955) Rank Correlation Methods. New York.

Khatib MA (2014) Diversification and growth in the Saudi economy. The First Conference of Business Schools at Universities, Gulf Cooperation Council (GCC), Riyadh, February 16–17, 2014, Pp. 1-37.

Ling JS, Hung WM, Wang Y (2005) Industrial Diversification. Asian Economic Journal 19: 423-443.

Mrzuk A (2013) Economic diversification in the Arab Gulf countries’ approach to rules and directories. Gulf Economic Magazine 24:  5-53.

Saudi Arabian Monetary Agency (2015) Annual Report Fifty-one.

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