The SAUDI ARABIAN ECONOMY
The story of Saudi Arabia’s economic transformation is one of the remarkable events of the 20th century. Indeed, few countries have achieved such a fundamental economic change in so short a span of time. That Saudi Arabia has managed to bring about such development and growth is even more remarkable in that it has done so without weakening the social fabric or adversely affecting the cherished traditions, values and beliefs of society — the undesirable side effects often associated with rapid socioeconomic change in other parts of the developing world.
Yet even as Saudi Arabia’s economic expansion is now proverbial, the mistaken belief persists that the nation is reliant solely on oil for its economic health. That oil has played a vital role in the nation’s economy, and continues to do so in the present, is without dispute. But the Kingdom has used its vast hydrocarbon resources, including a quarter of the world’s proven oil reserves, as the engine driving a vast national development program that seeks to establish a modern diversified economy that eventually will phase out and supplant the oil industry as the main generator of revenue.
Saudi Arabia’s transformation has its roots in the establishment of the modern Kingdom in 1932. At the time, the Kingdom had remained largely unchanged for centuries and was an agrarian society dependent on subsistence farming and commerce, lacking the infrastructure necessary for the economic growth and social development envisioned by its founder, King Abdulaziz bin Abdulrahman Al-Saud. There were few roads and the small number of seaports were used primarily for the pilgrimage to the two holy cities of Makkah and Madinah. More importantly, while the establishment of the Kingdom introduced peace, stability and other conditions conducive to development and growth, the country lacked the financial resources necessary to realize its goals.
The discovery of oil in commercial quantities in 1938 and its steady export soon after World War II provided the revenues needed to realize the Kingdom’s plans for national development. The following two decades witnessed the building of roads, airports, seaports, schools, hospitals and other facilities and services.
Saudi Arabia’s national development moved into high gear in 1970. Having already met the basic needs of society, the government now embarked on an ambitious endeavor: to build a modern economy capable of producing a wide range of consumer and industrial goods that so far had to be imported and which eventually would be exported to other countries.
The key to achieving this lofty goal was careful planning and meticulous implementation. Although development was ongoing in the 1950s and 1960s, the Kingdom introduced a series of five-year development plans in 1970 that brought cohesion and a long-term outlook to economic growth and expansion. Like building blocks, each of these plans served as the foundation for the next level of growth and development, whereby investments in one sector were not merely aimed at realizing advances in that particular field but were part of a broader effort that would ultimately complement and facilitate progress in other fields to achieve national development.
The first three development plans (1970-84) focused on establishing a modern infrastructure capable of servicing a thriving economy. Some 100,000 miles of modern roads, including highways, were built to connect the major urban and economic centers. Three international airports and 22 regional ones were built. Twenty-one modern seaports were established on the Red Sea and the Arabian Gulf. These facilities not only made travel possible from one part of the country to the other but, more importantly, allowed industrial and commercial activities to flourish.
To date, the government has built eight major universities, more than 24,000 schools and a large number of colleges and training institutions to develop the manpower needed by the growing economy.
While pushing ahead with its development plans, Saudi Arabia was taking steps to maximize earnings from the oil sector, which would be vital to fund further growth of social services and the continued expansion of the non-oil industrial sector. Saudi Aramco, the national oil company, invested in new production facilities, pipelines, plants and shipping facilities, while exploring for new deposits outside the traditional producing areas of the Eastern Province. The Kingdom also moved slowly away from the export of crude oil to processing petroleum into higher-value products at refineries in the country. It also invested in downstream markets in the United States, South Korea, the Philippines, Greece, India and China.
As Saudi planners had envisioned, the expansion of the oil industry generated greater revenue but, just as importantly, facilitated the rapid growth of the non-oil industrial sector through the establishment of factories that use the country’s abundant and inexpensive supplies of petroleum products, petrochemicals and minerals. As petrochemical and other oil-based industries were concentrated at the new industrial cities, particularly in Jubail on the Arabian Gulf and Yanbu on the Red Sea, the government provided incentives for the establishment of private companies at these sites. These non-oil industrial units would use as feedstock natural gas and natural gas liquids, which are by-products of the oil industry, to manufacture a wide range of products.
To lead the way in this new path, the government established the Saudi Arabian Basic Industries Corporation (SABIC) in 1976. The company soon set up a network of 15 giant factories, most of them in Jubail and Yanbu, that use the by-products of the oil industry to manufacture plastic resins and steel, as well as fertilizers that are sold to the agricultural sector.
At the same time, the Kingdom began offering long-term interest-free loans, which could be used to finance up to 50 percent of the cost of a new industrial venture, and other incentives to encourage greater private sector participation in the non-oil industrial expansion that was under way. By 1990, thousands of new factories, located in the eight major industrial cities, were using the by-products of the oil industry and the output of the SABIC plants to manufacture a wide range of industrial and consumer products, from plastic bowls to air conditioners, that previously had to be imported.
The Fourth (1985-89), Fifth (1990-94) and Sixth (1995-99) Development Plans focused on further strengthening the rapidly growing private sector and increasing the efficiency of the industrial sector.
A measure of the success of Saudi Arabia’s development plans is that the nation’s gross domestic product (GDP) more than quadrupled between the inception of the First Development Plan in 1970 and the beginning of the Seventh Development Plan in 2000 to 618 billion Saudi riyals (164.8 billion U.S. dollars). Significantly, the non-oil sector accounted for 70 percent of the GDP, while the private sector’s share amounted to 48 percent.
Saudi Arabia’s economic transformation has been all encompassing, reaching into agriculture, commerce, banking and other non-industrial fields. Prompted by generous government loans and support, agriculture has boomed during the development plans, transforming the Kingdom from a country that had to import almost all of its food to one that is now self-sufficient in the production of many cereals, fruits, vegetables and processed foods. Furthermore, it is now an exporter of many agricultural products.
The commercial sector has witnessed dramatic growth in the past three decades. This exclusive domain of the private sector accounts for a sizeable portion of the GDP and is expected to boom in coming years.
The banking sector has witnessed similar growth. There are now nine private commercial banks with thousands of branches spread throughout the Kingdom, and a thriving stock market has contributed to rapid economic growth.
Careful guidance and active support of the government has, in large part, made possible the steady industrial and economic transformation Saudi Arabia has undergone during the course of its development plans. The government has moved rapidly to meet every projected need and head off any problems that may impede growth.
To meet the challenges of a new world economy brought about by the formation of the World Trade Organization (WTO) and the rapid global changes expected in coming years, Saudi Arabia has unveiled a series of moves to propel the national economy into the next stage of growth and expansion.
The formation of the Higher Economic Council (HEC) in September 1999 was intended to bring about greater qualitative and quantitative economic growth. By taking over responsibilities from the Council of Ministers and other governmental bodies, the HEC is solely responsible for the conduct of the government’s economic policy. Since its formation, it has devised economic policy, coordinated the activities of government agencies whose work impacts the national economy, and presented proposals on development planning.
The Supreme Council for Petroleum and Minerals (SCPM), formed in January 2000, has performed a similar function in its area of specialization: to oversee the operations of the Kingdom’s oil industry. The formation of the council facilitates the process of formulating policy and decision making with a view to further developing the petroleum and minerals industries.
With the economy firmly on the road to sustained growth and expansion and the private sector playing an increasingly important role, the Kingdom took another historic step designed to enable the country to better deal with the challenges and opportunities of the 21st century by establishing the Saudi Arabian General Investment Authority (SAGIA) in April 2000.
Its primary responsibility is to provide information to foreign investors on investment opportunities available in the Kingdom. The opening of service centers at the Chambers of Commerce and Industry in Riyadh, Jeddah and Dammam has been a first step in this direction. The other primary duty of SAGIA is to facilitate and shorten investment procedures. The council has managed to shorten the process for gaining approval for a proposed investment venture to 30 days. SAGIA also has engaged various government agencies in steps to further facilitate foreign investment. These include easing visa regulations and entry into the Kingdom, as well as eliminating the need for a Saudi sponsor. SAGIA has also organized forums in the United States, the United Kingdom, France, Japan and Holland to familiarize local companies with investment opportunities in the Kingdom.
One of the more attractive fields to foreign investors is tourism. Saudi Arabia has many sites of archaeological and historic significance, natural wonders and cultural attractions. The government has in recent years been promoting domestic tourism, and the private sector has responded by investing huge sums to develop hotels, recreational facilities and services in Taif, Asir and other areas that traditionally have attracted domestic tourists. Additionally, large numbers of tourists from neighboring countries, especially from the Gulf Cooperation Council (GCC) states, visit the Kingdom every year.
In April 2000 the Council of Ministers approved the formation of the Supreme Commission for Tourism (SCT) to expand tourist facilities and further promote travel by Saudi citizens as well as visitors from abroad. The commission has already launched studies of the various sites and begun determining areas that require investment, including by foreign companies.
Greater economic growth and diversification in the new century will require massive infusions of funds in new industries, mostly from the government and the Saudi private sector. Realizing that joint ventures with foreign companies will result in infusions of additional funds, as well as the introduction of new technologies in specialized areas, the Kingdom has taken steps to further open the door to foreign investment.
Saudi Arabia has always welcomed foreign investors who are attracted by a combination of factors that make the Kingdom an attractive investment partner. These include the nation’s exceptional political, economic and social stability; the Kingdom’s geographical location at the crossroads of Asia, Europe and Africa; the availability of inexpensive energy supplies and raw materials; and access to a modern infrastructure. Consequently, thousands of foreign companies have invested vast sums of money to establish joint ventures with Saudi firms to supply products to the local economy and export to other countries, whether neighbors or those in far-off locations. American firms alone have invested more than nine billion dollars in 340 joint ventures in the Kingdom.
With modern industrial facilities (above, left), ports
(above, right), and financial
services, such as banks (below),
To further facilitate foreign investments, the Kingdom introduced a new law in April 2000 that gives foreign investors the same benefits, incentives and guarantees offered to Saudi Arabian individuals and companies. It allows foreign investors the right to own property, either jointly with a Saudi partner or independently. It also allows investors to remit funds abroad, protects their property from confiscation and reduces by 15 percent the amount of taxes imposed on foreign companies that have an annual profit of more than 100,000 riyals (about 26,700 dollars).
The formation of free trade zones and commercial blocs with fellow member states of the GCC and other neighboring countries, and the Kingdom’s impending admission into the World Trade Organization (WTO) will make Saudi Arabia even more attractive to investors, both Saudi and foreign.
With a mature economy that is rapidly diversifying in new directions, a vast pool of highly educated and trained manpower, a stable socioeconomic climate conducive to foreign investment, and a track record of achieving, and in many cases surpassing, the ambitious goals of its development plans, the Kingdom is well positioned to bring about the continued expansion of industry, petroleum and minerals, agriculture, commerce and banking, and other segments of its economy.