Countries of the World/COUNTRYS.BIN/dp/0307/03075.txt

Text File | 1991-06-25 | 40KB | 605 lines

$Unique_ID{COW03075}
$Pretitle{251}
$Title{Saudi Arabia
Chapter 3C.   Role of Government}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{oil
percent
plan
government
revenues
saudi
development
expenditures
early
economic}
$Date{1984}
$Log{Abdul Aziz*0307501.scf
}
Country:     Saudi Arabia
Book:        Saudi Arabia, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1984

Chapter 3C.   Role of Government

[See Abdul Aziz: Courtesy Saudi Arabian Embassy, Washington DC.]

     The economic philosophy of those governing Saudi Arabia has not changed
since the reign of Abd al Aziz, but the economic role of government has
changed tremendously. The goal of Saudi rulers has been to improve the
economic conditions of the country's citizens while retaining the society's
values. Historically, the way to achieve that was to rely on individual
initiative for economic development. The first king had little alternative
but to rely on the private sector for growth, for his revenue was inadequate
to staff a government, let alone to undertake economic and social projects.
Even a formal governmental structure was slow to evolve (see The
Institutionalization of the Saudi State, ch. 4). Exploitation of the
country's oil resources resulted in some wage payments to Saudis and local
purchases of goods and services by the foreign oil companies, but the impact
on the economy was minor. The main beneficiary of oil exports was the
government.

     The nature of oil revenues made the government the primary decisionmaker
for the economy. Before the 1970s, oil income increased slowly, and the
government usually operated under financial constraints; revenues were
insufficient to finance the desired programs and projects. Government economic
decisions were largely those of determining priorities among alternative uses
of limited resources. Government structure and subsidiary economic
organizations also evolved slowly. In 1952 the Saudi Arabian Monetary Agency
(SAMA) was created as the central bank, and in 1962 Petromin was formed; a
national airline had been established earlier. The situation changed
dramatically in the early 1970s, however. Oil exports expanded substantially,
royalty payments and taxes on foreign oil companies increased revenues
sharply, and the oil-exporting governments, including Saudi Arabia, began
setting and raising oil export prices (see Appendix B). Saudi Arabia's
revenues per barrel of oil (averaged from total production and oil revenues)
increased from US$0.22 in 1948 to US$0.89 in 1970. They had reached US$1.56 by
1973 and rose above US$10 in 1974. In 1982 revenues per barrel reached nearly
US$30. Between 1973 and 1974 government oil revenues jumped from US$4.3
billion to US$22.6 billion; between 1980 and 1981 oil revenues rose from
US$84.5 billion to US$101.8 billion (see table 9, Appendix A). The higher
revenues in the 1970s presented Saudi officials with the need to make major
decisions.

     The society encompassed those eager for modernization, conservatives
and traditionalists who opposed rapid change, and some who opposed any
change (see The Challenge of Modernization, ch. 4). One choice facing policy
makers in the early 1970s was whether to restrict oil production to a level
that was adequate to finance a limited economic and social development or
whether to allow production at a level that would meet world demand for crude
oil. If a relatively high oil production level was chosen, then a decision
had to be made whether the resulting revenues would be used for rapid
domestic economic and social development or invested abroad to earn income
over many years but subject to price inflation, exchange rate risks, and
possible sequestration. Also, there were intermediate policy choices as well
as supporters for the many options. Advocates for a policy of keeping oil in
the ground (except for that needed for limited development) made a strong case
that this was the best policy to preserve the country's resources for future
generations.

     The choices appeared to have been made by 1974 at the latest, although
the decisionmaking process was not known. Fortunately for oil-importing
countries, the House of Saud pledged to keep oil flowing commensurate with
world needs, arguing that the kingdom was as dependent on the stability and
prosperity of the consuming nations as those nations were on Saudi oil, i.e.,
the world was interdependent, and self-interest and other reasons would
promote responsible policies on Saudi Arabia's part. Saudi officials argued
that the kingdom had avoided such drastic measures as nationalization (opting
instead for a gradual takeover of foreign oil companies operating in their
country) and had urged moderation in OPEC price discussions, although yielding
to proponents of higher prices when necessary to preserve OPEC unity. In the
1970s and early 1980s Saudi Arabia stood by these responsible policies, at
times producing at near maximum capacity to meet consumers' needs and to
stabilize world oil prices. Some critics charged, however, that the government
had decided on industrial development and through much of the 1970s and early
1980s was as interested in high oil exports and prices to finance their
development effort as were other oil-exporting countries.

     By the mid-1970s the government had decided to use most of the growing
oil revenues for a massive development effort. An important part of that
effort was to industrialize, largely by investing in processing plants for
the country's hydrocarbon resources. This meant at least a decade of very
large investments to build the plants and the necessary infrastructure. It
meant financing and building the gas-gathering system, the gas and crude oil
pipelines to bring the raw material to the two chosen main industrial
sites-Al Jubayl and Yanbu-and the industrial sites themselves, which initially
were nearly barren wastes (see Manufacturing, this ch.). The development
effort also included many other projects, such as the huge and costly airports
at Riyadh and Jiddah, hospitals and schools, military bases and modern
equipment, desalination plants, and roads and ports. By the mid-1980s the
massive expenditures would cumulate to around US$500 billion.

     The decision to develop further the country's oil and gas resources
through downstream (see Glossary) investments in refineries and petrochemical
plants was logical considering the country's resource endowment. Such
activities are capital intensive, which fitted the country's small population
and large oil revenues. Income could be earned from exporting more refined
petroleum products instead of crude oil and by processing and using the
components of the natural gas that had been largely wasted before the 1980s.
Government control of energy and gas prices through ownership of producing
companies permitted energy and petrochemical input costs to be lower than in
most countries. In the early 1980s Saudi domestic energy and gas product
prices were one-fifth to one-quarter below world prices, although at least
petroleum prices were probably above costs of production and perhaps all
were. The Saudis followed a pattern set by many other countries, i.e.,
developing those products in which the country had a comparative advantage.

     The massive development effort entailed many risks. The size of the
effort and the technology involved required the participation of a huge number
of foreign workers for a long period, which disrupted the society. The pace of
modernization was also disruptive economically. Some observers questioned
whether Saudi refineries and petrochemical plants would be efficiently
managed and prove competitive in a reasonable time frame. They noted the
difficulties the Saudis would face in trying to introduce their products into
world markets dominated by large multinational firms, although Saudi Arabia
attempted to ease some of these problems by forming joint ventures with
internationa