Monday, January 24, 2011

Oil and Infrastructure Expenditures in Saudi Arabia

    Monday, January 24, 2011   No comments

by Ahmad M. Khatib

The country of Saudi Arabia has been generating increasingly more revenue from sales of crude oil in recent years. The researcher tried to study the impact greater oil revenue has been having on the development of the country’s economy through measuring the impact of oil revenue on infrastructure as one of the most important sectors of the economy. The study explored the relationship between oil revenue and government expenditures on infrastructure during the period of 1983-2007.

The study tried, on one hand, to find out if the increase in oil revenue had been associated with a similar increase in government expenditures on infrastructure. On the other hand, the study tried to measure the improvements these expenditures made by testing the relationship between infrastructure expenditures and some of the improvements resulted from these expenditures during the same period of 1983 to 2007.

The findings of this study suggested that the increase in oil revenue caused only a limited increase in government expenditures on infrastructure and the improvements resulted from these expenditures had also been limited.

Introduction

Saudi Arabia as the largest oil exporter in the world has been collecting massive amounts of cash from oil revenue as prices of crude oil has been rapidly going up in the last few years. Many wonder how this oil revenue is helping the country of Saudi Arabia achieving economic development and prosperity. One way to answer this question is to measure the impact that oil revenue is having on the development of infrastructure. This study tests the correlation or the relationship between oil revenue and infrastructure development in Saudi Arabia during the period of 1983-2007 to see whether greater oil revenue was associated with a similar increase in these expenditures.

The study also looks at the relationship between these expenditures and some improvements achieved from these expenditures during the same time period. The importance of the study stems from the fact that no study had focused on the specific relationship between oil revenue and the Saudi government main budget expenditures in total or individually or on the effects of these expenditures on their related sectors of the Saudi economy. So, the importance of the study comes from the lack of a documented quantitative study on this topic.

LITERATURE REVIEW

Infrastructure is a broad term used by economists to refer to a group of capital assets in a certain country or locality. There is no clear definition of what is included under infrastructure. Nevertheless, Pollin (2009) divided infrastructure into three areas: transportation, energy, and water management. He further divided those areas into sub areas which includes, roads and bridges, airports, railroads, public transportation systems, drinking water, dams, electric grids, and pipelines moving oil and natural gas.

Other researchers like Similarly, Torrance (2009) divided infrastructure into three categories: transport infrastructure, regulated infrastructure such as water, electricity and gas distribution, and social infrastructure such as schools and hospitals.

No matter what the definition of infrastructure is or its components are, the fact is that infrastructure investment stimulates the economy by improving performance and productivity which, in turn, helps bring about economic growth. Smit and Trigeorgis
(2009) believed that infrastructure investment builds a platform and creates a base for the growth strategy and it is the starting point for any investment to follow.

            The largely recognized positive impact infrastructure investments have on the economy as a direct cause for economic growth encourages different governments around the world to allocate sizable portions of their budgets to infrastructure to stimulate the economy, provide jobs, and of course improve their infrastructure.
           
Infrastructure in Saudi Arabia

Ever since oil was discovered in Saudi Arabia, the government has been spending enormous resources on building the country’s infrastructure almost from scratch. The country has achieved significant improvements in building its highways, airports, power generating plants, refineries, desalination plants, shopping centers, schools, and hospitals.
Most of this happened in the last half century as Clarke (2007) commented “Saudi Arabia has gone from a country of fractured tribes living in sand-swept villages, to a thriving, industrial nation dotted with skyscrapers, superhighways, airports and factories.” (Clarke,
2007, p. 32)

            The huge growth in infrastructure was a direct result of the growing petroleum industry. Kronemer (1997) indicated that during this growth that took place in less than 50 years, more than 80,000 miles of paved roads were built, 4000 hospitals and health centers, hundreds of schools and several universities.

Despite the considerable spending on infrastructure development in Saudi Arabia some researchers still see a severe need for more infrastructure investment. “Investments in infrastructure, mainly water supply networks, power plants, telecommunications capacity, housing and transport systems, is highly needed because of a growing population.” (Quilliam and Kamel, 2003 p. 49)

            Other researchers also stressed on the badly needed investment in the water supply sector. Mohorjy and Grigg (1995) noticed that despite the huge amounts Saudi Arabia has spent on water desalination, the country still faces severe water problems and doesn’t have the necessary comprehensive water management system.

            This conflict of researchers’ opinions on the evaluation of the effect of expenditures on the different sectors of the economy and what kind of improvements result from these expenditures in relation to Saudi Arabia is one more reason behind this study.

Research Methodology

To determine if relationships do exist between oil revenue, expenditures, and improvements; and if they do, what kind of relationships they are, the researcher ran simple linear regression analyses of two folds. First, between oil revenue and government expenditures on infrastructure during the period of 1983-2007.  Second, between expenditures on infrastructure and quantitative improvements achieved from these expenditures for the same time period. Also to discover any trend, same analyses were done after splitting the period of the study into three equal intervals of times: 1983-1991,
1992-1999, and 2000-2007.

Data Sources and Data Collection

To conduct this study the researcher used secondary data that he has access to from several sources including existing databases and websites. Data needed for this study consists of three types of data. First, Saudi oil revenue amounts for the period of the study 1983-2007. Second, Saudi main budget expenditure amounts on infrastructure and for the period of the study. Third, quantitative expenditure improvements resulting from the expenditures also for the same period of the study.

Annual oil revenue data for Saudi Arabia for the period 1983-2007 were collected from OPEC Annual Statistical Bulletins for the year 1983 and the year 2007.
Data about the Saudi budget expenditures for the period 1983-2007 were gathered from the Europe World Yearbooks 1983-2007; the Saudi Ministry of Finance website; and the International Monetary Fund (IMF) website.
Data on the population of Saudi Arabia for the period 1983-2007 were collected from the website of Population Division of the Department of Economics and Social Affairs of the United Nations Secretariat and from Nationmaster.com.
Data on the Saudi infrastructure for the period 1983-2007 were collected from the Saudi Ministry of Economy and Planning; International Telecommunication Union Website, and also from the World Development Indicators (World Bank).

            All data collected were then analyzed, sorted, and organized in tables using Microsoft Excel spreadsheets.

Limitation of the Study

            Data for this study would have a few limitations that should be indicated. First, data for this study were collected from several sources rather than one source and this may cause inconsistency in the way different numbers have been calculated. Another limitation is the timeline of the study from 1983-2007 may not represent the real relationship between the different variables. Furthermore, there is a chance of bias with those numbers collected from the Saudi government official websites as governments sometimes tend to tweak numbers to fit their own purposes.

Findings

Oil Revenue and Infrastructure Expenditures

Findings of the study revealed that the increase in oil revenue had not resulted in a similar increase in infrastructure expenditures during the period of 1983-2007. Moreover, findings showed that this relationship is not getting any stronger over time. While between 1983 and 1990, each increase of one dollar in oil revenue was associated with a decrease of two cents (-.0216) in infrastructure expenditures, a one dollar increase in oil revenue between 1991 and 1998 was associated with less than one cent decrease (-.0069) in infrastructure expenditures. Moreover, between 1999 and 2007 the increase of one dollar in oil revenue was associated with almost less than one cent (.0047) increase in infrastructure expenditures. At the same time the findings of the study also showed that amount of expenditures allocated to infrastructure regardless of the increase in oil revenue was dropping sharply over time. This amount decreased from an average of $2,583.1 million per year in the period of (1983-1990) to an average of $796.98 million per year in the period of (1991-1998) and to an average of $287.49 million per year in the period of (1999-2007).
           
Conclusion

The findings of the study didn’t reveal any positive relationship between oil revenue and government expenditures on infrastructure in the country of Saudi Arabia during the period of 1983-2007 and the increase in oil revenue had not resulted in similar increases to infrastructure expenditures.

It is very hard to pinpoint the exact reason or reasons why the Saudi government expenditures on infrastructure didn’t increase with the increase in oil revenue. However, one important reason is that the Saudi government has already spent very large sums on building a new and advanced infrastructure in the last few decades since the oil was discovered and money started flowing into the country. This created less need for new large investments on infrastructure and more spending on maintenance and smaller projects. Other reasons may be traced to the general socio-economic and internal situation in the country and may include the following:
a)      Bureaucratic government administration which controls the public expenditures.
b)     Many expenditures occur off- budget such as military expenditures and others.
c)     Large sums of oil money went to pay off government debt and obligations incurred by the Saudi Government from the Gulf War of 1991.

Expenditures and Improvements: Conclusion

As far as the relationships between infrastructure expenditures and the improvements resulted from these expenditures, the study concluded that there are no strong positive relationships between expenditures and improvements measured. The findings also didn’t reveal any relationship between infrastructure expenditures or transport and communications expenditures to improvements measured like road development or number of telephone lines per 1000 people between 1983 and 2007. Improvements in
Saudi infrastructures are considered very modest comparing with other countries around the world.
..
Dr. Ahmad M. Khatib teaches at Argosy University, Chicago.


_________________________________
References

Al-Yousif, Y. (2008). Do government expenditures inhibit or promote economic
growth: Some empirical evidence from Saudi-Arabia. The Indian Journal,
48(2), 92-96.

Clarke, K. (2007). A modernization paradox. Harvard International Review.

Foreign Affairs Magazine (2007), The Kingdom of Saudi Arabia.

Kronemer, A. (1997). Inventing a working class in Saudi Arabia. Monthly Labor Review,
120(5), 29.

International Telecommunication Union (2009). World Telecommunication Indicators
2009 Retrieved March 27, 2009 from

Mohorjy, A. M., & Grigg, N. S. (1995). Water-resources management system for Saudi
Arabia. Journal of Water Resources Planning & Management, 121(2), 205.

Organization of Oil Exporting Countries (1985), Annual statistical bulletin.

Organization of Petroleum Exporting Countries (2002), Annual statistical bulletin,
Retrieved May 28, 2009 from: http://www.opec.org/library/Annual%20
Statistical%20Bulletin/ASB2008.htm

Organization of Petroleum Exporting Countries (2007), Annual statistical bulletin,
Retrieved May 28, 2009 from: http://www.opec.org/library/Annual%20
Statistical%20Bulletin/ASB2008.htm

Pollin, R. (2009). ECONOMIC PROSPECTS: Infrastructure investments and the Obama
recovery plan. New Labor Forum (Murphy Institute), 18(2), 96-99.

Quilliam, N., & Kamel, M. (2003). Modernising legitimacy: Saudi strategies.
Alternatives: Turkish Journal of International Relations, 2(2), 26-65.

Saudi Ministry of Economy and Planning (2009). Development indicators. Retrieved
June 5, 2009 from: http://www.cdsi.gov.sa/showcatalog.aspx?lid=26&cgid=1022

Saudi Ministry of Finance (2008). Government budget data. Retrieved June 2, 2009,

From: http://www.mof.gov.sa/en/docs/stats/docs/book4.xls

Smit, H. T. J., & Trigeorgis, L. (2009). Valuing infrastructure investment: AN OPTION
GAMES APPROACH. California Management Review, 51(2), 79-100.

The Europa World Year Book, Country of Saudi Arabia (1975-2007).

World Bank (2009). World Development Indicators. Retrieved June 15 from: http://ddp-
ext.worldbank.org/ext/DDPQQ/member.do?method=getMembers&userid=1&que
ryID-135


SIME Managers

About SIME Managers

Editors of MAJALLA.

Previous
Next Post
No comments:
Write comments

Recommended Essays

- See more at: http://www.reasonedcomments.org/p/about.html#.Uzc-j_ldWrk

======================================

MAJALLA

MAJALLA.org is a repository of digital content relevant to the Islamic civilization. The site operates through the collaborative effort of volunteer Editors based in many countries around the world.

The site archives content in most languages. We accept content in languages in which some of our Editors are familiar. if you have a collection you want to make available through majalla.org, or you would like to become an Editor of content in a particular language, please contact us.

If interested in collaboration or in submitting your work or a collection you own, please contact us. Your efforts help in creating an archive of knowledge about Islamic thought, events, and history.

This is primarily a public service and the initial founders would like it to be self-sustaining in the long run so that it remains freely accessible and free of influence and control by narrow interest groups. Your support can help achieve these goals.

*****