The Effects of Oil on Development and the Rise of Saudi Arabia

Saudi Arabia is a “rentier” state that heavily relies on its oil rents. In fact, oil is the backbone of the Saudi economy since it represents more than 90% of its budget revenues and 95% of its total exporting income. It has the second largest oil revenue in the world, which represents about 20% of the world’s total oil revenues [1]. The large Saudi oil revenue has played a significant role in the country’s development. The discovery of Saudi oil in 1938 was a turning point in the history of the country. The discovery of oil has changed the social, political, and economic structures of this country. The oil income was used to improve the infrastructure and to maintain social stability in this country. It turn the country from a piece of barren desert to an advance modern state.On the other hand, the oil not always beneficial for the state of Saudi Arabia. In fact, it has caused many social, economic, and political problems to the country [2].

The History of Saudi Government Strategy and the Use of Oil Rent:

In the early years of the establishment of Saudi state in 1932 and before the existence of Saudi oil, the country had neither natural resources nor industrial activities to help running the state [2].

084ce8448b5a4d1186ab76386d6b4607
Cited from http://mz-mz.net/

At that time, the first king of Saudi Arabia, King Abdulaziz Al-Saud, had no choice but to develop alliances with the local elite merchants to fund the government. As a result, the elite merchants became partners in the government instead of being clients. However, after the discovery of oil in 1938, the relationship between the government and the elites has changed. At that time, financial support was no longer needed. Therefore, the Saudi government provided economic interests to the merchants as return of giving up their partnerships with the government [2].

In a religious society like Saudi Arabia, the Ulama (religious scholars) have a great influence over the population. Therefore, the King decided to include the Ulama into the government’s bureaucracy. They became government employees who receive income from the government. By doing that, the Ulama became under the government control. Moreover, the government created a system of local ruling where the high governmental administration positions are run by some members of the ruler family [2].

The oil also played a significant role in making the population loyal to the rulers of the country. In fact, the oil wealth strengthened the position of the monarchy system of Saudi Arabia. Saudi government has used the wealth of oil to maintain its power by providing benefits to its citizens. In 2011, for instance, Saudi Arabia was affected by the Arab Spring, so a small scale of social unrest started to appear in different parts of the country. As a result, the Saudi government immediately responded to the event by providing a huge amount of social benefits, which cost the country about $130 billion [2].

In fact, the large oil revenues ensure to Saudi rulers a high level of autonomy from society. The high oil income allowed the government to create a system of negative taxation. The government provides many social programs, such as free education and health-care, unemployment benefits, and subsidized water and electricity. In this situation, the government has no need to pay close attention to the demands of its citizens. The gap between the government and the population become very wide. As a result, there’s no sense of political of freedom. The government has a total control over all the country’s sectors [2].

 

However, in Saudi Arabia, the government developed what can be called “islands of bureaucratic efficiency.” In fact, the companies that are related to the oil sector are very efficient. Saudi Aramco is one of the best examples of highly efficient oil companies. Such government-owned company does not have the complexity and corruption that are seen in the other governmental institutions. Islands of bureaucratic efficiency are controlled by well-educated Saudis and highly experienced foreign workers. Such companies were originally established by foreign countries, such as the United States, and after a period of time, the Saudi government nationalized them [2].

Foreign Workers:

Moreover, there are many private-public companies that highly successful. However, the private sector is mainly run by foreign workers.

Saudi
Cited from http://www.dhakatribune.com/

In this country, foreign workers make up 87% of the total private sector workers. The country has more than 9 million migrant workers live within its borders [3]. In fact, employing foreigners will not generate economic growth. The Saudi government does not provide the migrant workers long-term contract. As a result, instead of improving the economy by spending some of their money in the country, the foreigners’ wages go outside the country causing a serious damage to the economy of this country. In fact, Saudi Arabia loses millions of dollars every year as a result of the money flow out of the economy [2].

Oil is Double-Edged Sword:

It is true that the discovery of Saudi oil has affected the country positively in many different fields; it is also true that the oil cause many social, political, and economic problems in this country. One of the most important disadvantages of oil is the unstable market prices. As it was mentioned above, the Saudi government provides many social services to its people to maintain stability of its governmental system. This is will not be a problematic if the oil price is high. However, it is going to be harmful for the government if the price of oil face a dramatically decrease. The country will not be able to fund these subsidies and social services [2].

When the price of oil goes down, it is a very risky action if the government tries to cut these subsides. People are less likely to accept such action. In fact, it may lead to social unrest that is going to affect the structures of the country [2].

One of the other most significant problems related to

Saudi-Caricatures
Cited from National Geographic

oil is the fact that people started relying on the benefits that are provided by the government and show no interest to work in the private sector. The government created very large bureaucracies and employs Saudis with very large wages compared with the private sector’s wages [2].

Solution:

In order for Saudi Arabia to improve its economic and political situations, it should seriously go through some economic and social reforms. The first and most important change that should be done by the government is to decrease the wage gap between the private sector and public sector to encourage the Saudis to participate in this sector. Saudi Arabia also should diversify its economy. Relying heavily on one source of economy is not safe situation for the country’s future. Oil is a product that can be run out or replace with other kind of energies. Therefore, the government should invest in the private sector and encourage manufacturing activities in the country [2].

 

[1] http://www.sama.gov.sa/sites/samaen/ReportsStatistics/ReportsStatisticsLib/5600_R_Annual_En_48_2013_02_19.pdf

[2] Cammett, Melani; Diwan, Ishac; Richards, Alan; Waterbury, John (2015-02-24). A Political Economy of the Middle East (Kindle Location 7970). Westview Press. Kindle Edition.

[3] http://www.arabnews.com/news/448234

 


4 thoughts on “The Effects of Oil on Development and the Rise of Saudi Arabia

  1. The first video is actually really weird! I’m not exactly sure what it’s trying to illustrate about Saudi Arabia? Anyways, fun to watch either way. I think you hit the nail on the head with your last paragraph about your advice for Saudi Arabia’s future. How can a country rely forever on a resource that is unsustainable? Like many other gulf countries in MENA, Saudi has been able to satisfy their population by providing health care and education for free, but just like you said how long can the government employ these benefits its resource that’s bolstering the economy isn’t going to last forever? I wonder if there will be another wave of Arab springs within the gulf countries when these countries run of out oil, and can no longer suppress their populations with benefits that temporarily satiate them.

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    1. Thank you for your response. I just want to clarify the first video for you. It is actually illustrates the whole history of Saudi Arabia year by year. It shows how the oil plays a significant role in building the country. Before the discovery of Saudi oil, Saudi Arabia was a piece of desert that had nothing to do with modernization. It shows how poor Saudi people were in the early 1930s. If you follow the video carefully, you can clearly see how the Saudi government control the oil production according to the world political events. In 1973, for instance, the video shows that Saudi Arabia cut its oil production to pressure the West to not supporting Israel during the Six-Day war. This is only one example and there are many other example in this video. Moreover, the video shows the foreigners’ way of lives in Saudi Arabia. I hope that was helpful clarification and if you need any further explanation please feel free to ask since the video is containing so many more information about the country.

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  2. First of all, great blog post, the videos are a nice touch to the presentation of the information. Saudi Arabia is one of the best examples of a country that is placing all of its hopes on one source of revenue: oil. When oil does run out or even becomes more scarce, this will no doubt greatly impact the government in a very negative way. With the great amount of money that they gain every year, they should place that towards diversification instead of becoming comfortable with their situation. Also, the difference between the public and private sector in relation to jobs should definitely be reformed. The monarchy and ruling powers should make the people want to become employed and give them that chance to provide for the society. Hiring of foreign workers should be optional, not mandatory, and only used to supplement the citizen workforce of the country. This is the same problem that is seen in a variety of Gulf countries and they should be able to see that by demotivating your population and simply quieting them with social benefits on one resource, it is only a temporary fix at best and the root problem must be dealt with.

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