Industrial and Micro-Economic Policies that Have Contributed to the Success of Saudi Arabia - Example

INDUSTRIAL AND MICRO-ECONOMIC POLICIES THAT HAVE CONTRIBUTED TO THE SUCCESS OF SAUDI ARABIA Name of Student Institution affiliation INDUSTRIAL AND MICRO-ECONOMIC POLICIES THAT HAVE CONTRIBUTED TO THE SUCCESS OF SAUDI ARABIA Saudi Arabia is considered one of the developing countries in the world after a surge in prosperity in the previous decades when the country was entangled in wrangles that threatened the country’s stability. However, it is evident that the country has a lot of potential to diversify its economy and attain its ultimate goal of state-sponsored capitalism. This is a model where a country is focused in pursuing strong intervention in economic issues that foster rapid industrialization. This paper therefore aims to review the macroeconomic policies as well as industrial policies which have contributed to the current success of Saudi Arabia. For the past decade Saudi Arabia’s economy has experienced a significant rise moving up from being the 27th largest economy globally in the year 2003 to becoming the 19th largest economy in the world in the year 2014. In addition to this, Saudi Arabia’s current nominal GDP is about $750 billion which is significantly larger than that of counties such as Sweden and Switzerland which have relatively more diversified economies compared to that of Saudi Arabia (Mirghani 2014, p.13). On the other hand, the country’s nominal GDP on per capita basis is $24,000 which is slightly behind of Portugal and behind South Korea which are also countries who have more diversified economies (Waimer 2015, pp.1746-1755). Consequently, Saudi Arabia’s potential of more economic diversification is also boosted by the countries features which entail; a sizeable population of migrants and a booming oil sector. Further, to these opportunities, Saudi Arabia also has a very promising oil sector being the largest oil exporter in the world, this industry injects over 90% of the country’s revenue to the government (Sattar 2007, p.31). The countries development in the past decade is claimed to have resulted to the sharp increase in the oil process which saw a barrel sale increase from $30 to $110. This led to the country’s GDP to double. Additionally, this the booming oil industry has led to the country eliminating its national debt since growing indebtedness has proven to be a great hindrance to the major developing economies (Niblock (n.d.)). Nonetheless, due to this booming oil sector the country has been able to increase its reserve assets to $732 billion which is a rare equivalent of almost 100 percent of the country’s GDP (Turner 2012, p.91). It is also notable that economic diversity unfolds not only in Saudi Arabia but also in the Gulf states. Kubursi (1984), claims that if oil supplies were unending and its demand would be continuous and strong for oil throughout the need for economic diversification would not be necessary (Simon n.d, pp.59-62). Governments of these countries in the Gulf would merely need to ensure that the revenues collected from the sale of oil are distributed among the population. However, since in the real world these oil resources are finite and through experience the oil process are not and demand constantly fluctuate there is therefore need for economic diversification (Nurunnabi, 2017, p.13) . The other reason as to why Saudi Arabia and countries in the Gulf need to diversify their economy as pointed out by Beblawi, 2011 is because oil prices are known to crowd out other economic activities in these countries resulting to the countries becoming over dependent to the oil sector (Schwarz 2008, pp.599-621). The principle of industrial policy of Saudi Arabia was issued under the 1394 AH/1974 policy statement which determines the principles of the country’s industrial policies that are being followed by the country focusing on industrial development( Nurunnabi 2017, p.12). The motive behind this policy statement being issued is that it is the Governments desires to fulfil opportunities to the Saudi Arabian citizens in the course of achieving social and economic benefits from the countries industrial development program (Sattar, 2007, pp.228-233). In addition to this, the mentioned policy statement is also meant to inform the countries departments, ministries and business men in and outside the country of the main principles of the state policy in focus towards industrial development. The Saudi Arabian Government has taken measures that guarantee economic diversity. Thus, the government has implemented industrialization policies which entail a series of productive investments which are fostered through embracing technological advancement and investing in competitive industries with strong futures. Some projects in line with this particular policy by Saudi Arabian government is creation of a new financial district in the country’s capital city, Riyadh as well as Kin Abdullah economic city on the Red sea. In this case, the country created new universities and 81 new hospitals and a new metro transits line (London 2008, p.301). This particular investment under the country newly implemented industrialization policies has led to the number of physicians doubling in the past decade (Peterson 2009, pp.1-18). Moreover, it has also led to the infant mortality rate to drop by two-thirds while the life expectancy rate has significantly risen by nearly seven years to hit a record high 76 years which is higher than other countries with relatively diverse economies such as China, Hungary and Turkey (Squalli 2007, p.1197). In regards to the new university, the education in Saudi Arabia accounts for an estimated 25 percent of the government spending as well as an estimated 60 percent of each age cohort which goes to the country’s tertiary education (Onour, n.d, Pp 102-104). This particular portion is claimed to be similar to German and France, countries whose economy can be said to be quite diverse. However, in regards to this policy on industrialization, especially the sector on education it is claimed that this policy might not have worked as per the perceived out come. Consequently, it is notable that the overall quality of education has remained significantly low (Gylfason 2001, p.851). In line with this, Niblock & Malik 2014 point out that most schoolchildren in Saudi Arabia perform poorly in international comparative tests and the country has a significantly high university dropout rate which stands at a record high 50 percent. They further argue that some infrastructure investment for instance on the schools in Saudi Arabia might be clouded by long delays in the budget and over run of these budgets by other projects which are prioritized (Al-Yousif 2002, p.133). Further, the infrastructure investment in increasing the number of hospitals in the country which is under the country’s industrialization policy has also faced some setbacks. The country is listed among those with the highest prevalence of diabetes and obesity globally. Critics have pointed out that all the infrastructure investment injected into the country’s health sector have not been able to reduce the prevalence rate of these two diseases in the country (Al-Awad & Harb 2005, p.1046) Despite these setbacks these investment have indeed boosted the country’s economic diversity through boosting the growth of other economic sectors hence ensuring the country is not over dependent on the oil sector (Mirghani 2014, p.13). In line with this, the reviewed construction of a university in Riyadh as well as 81 new hospitals under the industrialization policies has contributed to the degree of urbanization of this city and the overall economic growth of Saudi Arabia. It is estimated that the degree of urbanization in Saudi Arabia is 83 percent which is significantly larger than some of the Western European countries. In line with this it is notable that vibrant cities are also key drivers of the economic growth of countries therefore, the evident high degree of Urbanization is an asset for this country (Niblock, n.d.). Consequently, a large portion of the country’s urban activity is concentrated in the five large metropolitan clusters with the largest one being Jeddah- Mecca-Taif located on the Red Sea which has an estimated population of seven million and Riyadh six million (Mehrara 2007, p.2941). However, there are a number of developments in line with the country’s industrialization policies which are not known. Despite this, the urbanization of the big cities within this country has been on the rise. This has also contributed to the participation rate of Saudi Arabian women in the workforce to significantly rise (Klein & Olivei 2008, p.861). Hence, this participation rate has increased by eighteen percent to hit a record high of 1.2 million of the female working age population. Additionally, it was noted that the fastest job growth for women has come from the public sector which has been driven by the government that has pushed the entry of women into certain types of employment especially in the retail sector (Montagu 2011, n.d). These particular policies which have seen women being encouraged to participate in the workforce has also contributed immensely to the economic improvement of the country. On the other hand, Saudi Arabia’s government policies on industrialization have also focused on the expansion of the country’s manufacturing industry as well as the agro-depending industries (Caporale, Howells & Soliman 2004, p.39). The country’s policies are built on the high prospectus that these field promises to achieve in regards to contribution towards the county’s national income. The polices are also based on the these industries contribution in regards to job opportunities which lead to significant rise in the country’s standards of living as well as the country’s gains in regards to t economic diversification (Mirghani 2014, pp, 13). Additionally, these policies on industrialization have as well proven to have a number of advantages for instance, increasing Saudi Arabia’s national income and reducing the effect of economic upheavals on the country’s economies and also ensuring that there are available job opportunities which the capability of Saudi Arabia’s workforce and caliber could fit in (Mahadevan, & Asafu-Adjaye 2007, p.2489) In line with the industrialization polices Saudi Arabia has also adopted the principles of free completion in the country’s industrial and commercial sector. In this case, it is claimed that the county realized that in order for it to achieve industrial development objectives the private institutions should be granted full freedom to bear the responsibility of spearheading the industrial projects. Additionally, it is also claimed that the country also realized that for this objective to be achieved and steer economic development the country will need to present these private institutions with all support and assistance at all stages of the implementation of the related projects(Minnis, 2008, pp.29-46). Saudi Arabia also took up another policy to help improve economic development and increase its efforts to diversify its economy is privatization of the country’s economy (Schwarz 2008, p.611). This particular policy has seemingly led to a stronger economic performance in the country. The Saudi Arabian government is encouraging individuals to start up their own private businesses since private businesses have great promise in regards to driving the country’s economic growth. In this case, the country has placed measures in place in regards to this policy by reducing the procedure of registering businesses therefore encouraging more privately owned businesses to crop up in order to boost the economy and shift from being over reliant to the country’s oil sector (Forener, n.d.). Through, this policy the country has also invested in the acceleration and liberalization of its service sector in an effort to maximize its net exports of services. The Saudi Arabian government through the implemented privatization policies is looking forward to ensure that liberalization is implemented gradually in most of the country’s service sectors in response to the commitment undertaken by the country General Agreement on Trade in service treaties (Dye & Merriman 2000, p.313). However, the notion of private businesses driving economic growth has been highly contested by Hertog(2013), who underscores the role of Saudi Arabia in the Gulf business development. He argues that despite that the Gulf businesses have seemingly moved beyond the stage of purely seeking-rent which is clearly far from autonomous in this particular country. Thus, these polices have therefore fostered economic modernization by putting in place required reforms (Clark, 2010, pp.306-308). These policies are claimed to foster reintierism which has been essential in the non-oil private sector in Saudi Arabia. Thus, through rentierism, the country has been able to generate a significant figure in tax income. This has been fostered by the measures put in place by the country in encouraging more individuals to start business and the increment of the country’s private sector. In addition to this, the government also implemented policies on provision of cheap energy to the private businesses in order to promote the country’s private sector. This significantly reduced the cost for the individuals within Saudi Arabia to set up businesses, therefore more people were more inclined to start their own businesses with the cost being relatively subsided through the policies put in place by the Government (Lane & Milesi-Ferretti 2001, p.281). The business sector in Saudi Arabia is therefore controlled by the Government illustrating a stable business environment since the government seeks to benefit from this particular private sector. Therefore, the goverment is more incline to put in place measures which ensure that there is constant growth in the country’s private sector, hence in the long end benefiting business in this sector and consequently fostering economic growth (Barnes 2007, p.931). In line with this, the Saudi Arabian government has also implemented support structures for financing industrial projects as well as participating in their management, especially if they will be used beyond the private sector capacity. The Saudi Arabia government highly views competition that targets customer’s interest and sees it as the most ideal way for pushing for improvement and stability of the private industry (Al-Awad & Harb 2005, p.1047). It is claimed that this country emphasizes on its private sector focusing on the target customers’ interest since this relatively pushes for this sector being a dependable solution which the country’s economy can turn to. Additionally, the country is also claimed to have implemented these policies in order to assimilate the country’s private sector to the purchasing market energy (Albassam 2015, p.114). Saudi Arabia achieves this by choosing the appropriate projects for the market needs and which are characterized by a low production cost. In turn it is therefore able to determine the prices of production at reasonable costs for both the consumer and producers for the sole purpose of economic growth and development. The other policy that has fostered Saudi Arabia’s goals in attaining economic development and diversification is opening up the country’s domestic stock exchange to the foreign investors. This particular policy was implemented under Article 20 of the capital market law. Moreover, another cluster was included in this policy where the country offered to give tax incentives to foreign corporations which trained and recruited the country’s labor force (Montagu 2011, n.d). This were strategies for specific region in the country which were experiencing relatively high rates of unemployment. This included regions such as; Hail, Jazan, al-baha, al-Jouf which were located along Saudi Arabia’s northern border. Other than creating more job opportunities for the Saudi Arabian nationals this policy was also structured to foster the country’s minerals sector (Akoum 2009, p.437). Saudi Arabia is claimed to be the largest country in the Middle East by land mass. Therefore, the geology of this country gives it a significant abundance in minerals and natural resources compared to the other countries in the Middle East. It is estimated that Saudi Arabia has over 48 minerals. The government therefore, has seen this as another potential sector which their can use in diversification of its economy (Al-Awad & Harb 2005, p.1050). Thus, the Saudi Arabian government has adopted policies which revolve around mining codes that are meant to simplify the private sectors investment in the country’s mining sector. These particular policies are in line with those implemented for the foreign investment in the country. These particular policies stipulate that there will be no requirement for payment of mineral royalties, corporate tax liability will be reduced by 20 percent and mining companies might get tax free importation of mining machinery and equipments (Squalli 2007, p.1199). The country’s push for industrialization means that there is a strong downstream market of its mineral sector that is untapped. In efforts to invest in the mining sector, Saudi Arabia’s government has formed a joint stock company, Ma’aden which deals with goals based metal mining and the country’s infrastructure sector. Apart from boosting the economic diversity of Saudi Arabia this has also fostered the country’s workforce reducing the level of unemployment also boosting the spending capability of the Saudi Arabian citizens which directly impact on the other industries within the country (Albassam 2015, p114). On the other hand, this investment into the country’s mineral sector has also fostered the country’s localization efforts through increasing the country’s exports which has significantly contributed to Saudi Arabia’s GDP (Sattar, 2007, pp.228-233). In line with these policies the country has also taken measure to build a database of the countries resources in an effort to discover all minerals which could foster the diversification efforts of the country’s economy. Moreover, Saudi Arabia has also taken up measures to review the licensing procedures where it intends to make the investment process in this sector more efficient therefore, attracting more investors in the long end (Al-Yousif 2002,p.142). The Saudi Arabian government has also taken measures to develop funding methods in order to foster the efforts of the willing investors in this country. In line with this, Saudi Arabia has formed international partnerships to ensure that effective investment are made in its mineral sector which has pushed the country’s efforts towards diversification of its economy (Turner 2012, p.91). In line with the policy on the taping on other economic sectors of the country it has also implemented policy relating to non-oil export development initiatives. These particular policies entail the establishment of export oriented industrial zone where the country is able to focus it industrial sector in manufacturing of products which could be exported therefore shifting the country’s economic dependence on oil as it main export product (Minnis, 2008, pp.29-46). In this case, these policies also focus on the expansion of FTAs as well as the enhancement of non-oil exports. Additionally, these policies have also led to the promotion of Saudi Export The other economic development policies that Saudi Arabia has taken up in effort to protect its private sector from the local markets competition of similar commodities are the custom protection policies. These economic policies have protected the production of these local industries ensuring that they cover majority of the country’s local market (Klein, & Olivei 2008, p.872. Thus, the country has significantly raised the custom duty as well as other taxes on similar goods to those in Saudi Arabia’s local market. However, in light of insufficient local production; Hertog, (2006) argues that during these situations this country reduces this taxation burden in an effort to ensure that there are enough products in the country’s local market. This policy also entails a significant rise in the product prices compared to the prices of the imported products which will lead to a significant rise in the production cost of the country’s national industries. On the other hand, these policy also foster addition of value in both the country’s national income and the products as well as creation of job opportunities this therefore will create some importance to the county’s national economy as well as guarantee protection of the industry (Montagu 2011, n.d). On the other hand, part of Saudi Arabian industrial policies also entail creation of “six economic cities” and making them self sustainable. The government has set up business- friendly regulation which has ensured that the number of businesses setting up shop in these cities has increased therefore, boosting the economy of the country in general (Peterson 2009, p.8). Part of these policies also entailed the $70 billion investment injected into these cities by the country where majority part of it was channeled to infrastructure in these cities (Forener, n.d.). Due to this infrastructure these cities are therefore able to host clusters where first from a variety of industries are huddled together with their close proximity boosting their creativity and productivity. Further, the country’s policies have as well opened doors to foreign investors. Evidently, the country’s strategic position where it is centrally positioned between Asia and Europe, therefore more investors are likely to come into the country to invest considering the friendly policies implemented by the country. The receptive nature of the country makes Saudi Arabia a more ideal place to do business with regulation being less strict and their enforcement being more predictable (Nurunnabi 2017, p.13). The country’s take on the social rule where it seems to have taken up a rather handoff take on women and work, where women are more encouraged to work, a clear indication of a need to foster economic development. This particular policy has attracted a significant number of foreign workforce which feel that the working conditions in the country are better compared to how they were some years back (Niblock (n.d.)). Part of this policy also entails huge contracts which are dished out to companies investing in these cities which act as incentives for the investors. However, these contracts are restricted to the top firms in various industries and it also come with some requirement. For instance, some of these requirements entail that these firms should employ a particular percentage of its workforce (Montagu, 2011, n.d). Thomson, (2014) however, cautions that this particular requirement tends to act as a bottle neck to the these firms profit maximization since these particular workforce might not have the required skill set that the firms might wish for its workforce. In addition to this he also argues that since the part of the restriction also require the firm to be dependent on the public spending this would leave it with a rather less room for innovation (Lane, & Milesi-Ferretti 2001, 281) Also policies regarding the increment of the government spending have also been put in place to foster the country’s goals on diversification of its economy. In this case, Saudi Arabia has allocated an estimated 372 billion Riyal for projects that will be developed in the country’s major sectors such as social and health, human resource, economic resources and infrastructure. This allocated budget is estimated to be 76% more of what was previously allocated to the company, in addition to this it is also 15% more that what was previously allocated into the development sector (Onour, n.d, Pp 102-104). On the other hand, Saudi Arabia has also implanted policies which have enhanced competitiveness in the country’s economy. The country has implemented polices which have fostered creation of new industrial zones, incubators, financial centers and technology parks. This particular policy has significantly increased the productivity of labor in the country (Waimer 2015, pp.1746-1755). Consequently, this has also fostered the country’s average income level leading to a significant increment in the spending behaviors of the citizens. In addition to this, this policy has also increased the number of students registering for engineering and technology related courses by 30%. This therefore means that the country’s industrial sector will benefit from competitiveness which will seek to increase its productivity in the long end (London 2008.Aarts & Roelants 2015,p.302). Therefore, labour productivity in the country’s major economic sector is guaranteed to increase due to this particular policy and incentive. In conclusion, it is evident that Saudi Arabia’s success on development can be attributed to the countries polices which has fostered it economic diversification and over reliance in oil by its economy as it main export product. However, the country is yet to attain its economic freedom. Therefore, it is still engrossed in finding ways which it can continue to diversify as its pushes it economy from being over dependent to its booming oil sector. In this case, the country is still in process of adopting more policies to foster this goal and improve its economy. References Aarts, P. and C. Roelants (2015). Saudi Arabia-A Kingdom in Peril. 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