The Trade Income Distribution from 2005 to 2010 in Saudi Arabia - Research Paper Example

The Trade Income Distribution from 2005 to in Saudi Arabia EXECUTIVE SUMMARY Trading contributes to the major income of the country and is one of the most important providers to the national income in Saudi Arabia. The national income of Saudi Arabia is mostly dependent on the international trade income of the country. Oil being the major product exported, the fall in the global price of the product affects adversely the real income of the country. The country should be more competent about diversifying their products so as to spread the risk of the fall in the national income of the country in response to the fall in the price of a single product. The national income of the country has been unevenly distributed because the trade income is based majorly on the oil sectors. The government is more focused on minimizing poverty rather than mitigating the gap between the incomes. The trade income of the country can possibly be considered as a reason of the spread of such inequality in income. INTRODUCTION The expanded trade produce and the changes in the income distribution have been highly imbalanced over the last few years in Saudi Arabia. However, freer trade is only possible with the use of better political as well as socio economic development of the economy. The empirical growth theory has been propounded on whether the government expenditure can promote the growth of the economy. Saudi Arabia’s present economic score has been 62.2 making the economy 77th freest economy in the world as per the economic index of 2014. The oil-based economic system backed by absolute monarchy rule has been the major reason for the steady economic development of the country. Fiscal policy is observed to be a key element of Saudi Arabia’s macroeconomic policies stressing on the financing investment and the consumption activities. Parallel to the above economic trends the country is also observed to be the fastest growing economy in the Middle East and North Africa regions. The government of Saudi Arabia gives major importance to the public expenditures, which broadly includes wide ranges of expenditures ranging from wages to the public welfare and human resource reinforcement. Considerably, it could be noted that the discovery of the oil in the commercial quantity brought major changes in the economic development of the country. During the Post-World War II, the country took active participation in the export of oil all over the globe. Consequently, the steady export of oil led to the development of a strong infrastructure of the country, which assisted in developing the economic growth of the country in return (Alshahrani and Alsadiq 4-12; Information Office, “Economy & Global Trade”). THESIS STATEMENT The research paper elaborates the micro and the macro economic effects of trade on the income distribution in Saudi Arabia. The different political, social as well as economic development factors affecting the trade and income distribution of the country has been broadly observed. Finally, the trend of the trade and the income distribution in Saudi Arabia has been considered through the different timeline between the years 2005-2010. DISCUSSION The discovery of vast oil reserves in the country during the 1930s marked a golden era for the economic development of Saudi Arabia. The country’s financial development was related with the massive trade surpluses that the country faced with regard to the export of oil. The massive price boom of oil in the 1970s and the early 1980s nourished the country in constructing a welfare state in relation to trade balance. However, with a downtrend of the oil prices in the 1980 the trade balance sank. The trade trends of Saudi Arabia have majorly been dependent on the export of oil. Owing to the lack of the diversity of the exported goods, the major export turnover of the country is highly dependent on the international oil prices. Considering the major effects of the downtrend of oil prices on the total economy of the country, the government took effective measures to instigate the other manufacturing sectors to export goods. In this respect, the risk of the fall in Gross Domestic Product (GDP) with the fall in the global oil price made the government more conscious about trading trends and introduced a diverse range of products for export and import operations (Olds and College 3-10). The Major Trends in Gross Domestic Product. The massive GDP growth in Saudi Arabia has been observed majorly to be a result of the development of the oil sector. The upsurge and the down surge of the oil market affect the GDP trend of the country majorly. Correspondingly, the government has been taking major interest to promote the non-oil activities to reduce the impact of the oil in the total GDP of the country. Major stress has been provided by the government to minimize the dependency on a single product to contribute to the majority of the national income (Fayad, Raissi, Rasmussen and Westelius 4-10; Olds and College 3-10). With the implication of the various important norms and schedules, the country has been successful in bringing down the contribution of oil from the 40% in 1990 to less than 30% in 2011. Irrespective of the government regulations, the dependency of the national income on the increase in the oil price is still prominent (Fayad, Raissi, Rasmussen and Westelius 4-10). Figure 1: Gross Fixed Capital Formation Sources: (Fayad, Raissi, Rasmussen and Westelius 4-10) From the (Figure 1), it can be identified that the trend of the country’s economy on the fixed capital formation and its inclination towards the oil production of the country. The above figure depicted that the trend shifted from the oil producing to the non-oil producing in the 1980s owing to the fall in the oil prices. Considerably, the recent intervention of the government has developed the situation of the non-oil production sectors and has encouraged their elated contribution towards the national income (Fayad, Raissi, Rasmussen and Westelius 4-10). Figure 2: GDP Growth Rate per US$ Source: (The World Bank Group, “GDP Growth Rate per US$”) The GDP growth rate with respect to the US$ has been observed to be positively growing except in the year 2009 when the GDP growth rate faced a negative trend of growth (The World Bank Group, “GDP Growth Rate per US$”). Inflation Rate Fluctuation. The change in the growth of rate of the inflation has been observed to grow in a stagnant rate of 4.6% annually during the year 2005-2011. However, there has been a 73% growth in the cost of living. The increase in the 6.8% of the group of food and beverages increased the total national expenses to a larger extent. On the other hand, the low interest rates, ample liquidity and high fiscal spending possess the threat of the inflationary risks in future. The inflation rate of the country has grown upto 11% in the year 2008, which was recorded to be the highest rate of inflation in the recent years. Being linked with one of the cheap dollars of the world economy the risk from the threat of inflation is observable in Saudi Arabia. Noteworthy to the above factors, 85% of the total imports are from countries other than US, which effectively hampered the domestic price rate of Saudi Arabia. The inflation trend of the country has been observed to be rising at a steep rate since 2005-2006 reaching the peak in 2008 and falling down to 5% in the year 2009 (Credit Agricole 10-17). Figure 3: Inflation Rate Sources: (Credit Agricole 10-17) Economic Growth. The growth rate of the world economy has been registered to be growing at the rate of 3% in 2009 following a negative growth rate of 0.6% during the year 2008., which positively effected on the real GDP growth of the country. The phenomenon could be well observed from the downward trend of the GDP during the period 2003 to 2012 (Research and Statistics Department 8-20; Figure 4). Figure 4: Real GDP Growth Rate Sources: (Research and Statistics Department 8-20) In order to diversify the export prices, the country has promoted private sectors catering business including telecommunication and the natural gas sectors among others. The country has enhanced its technical and knowledge skills in order to develop the economy of the country. Considering the fact that the country is majorly dependent on oil export for foreign earnings, the country is focused to reduce this trend and majorly diversify their export products in other sectors in order to draw foreign investment (CIA, “The World Factbook”). Foreign Direct Investment (FDI) is observed to be showing a positive trend in the economic development of the country. With the inward flow of FDI being evidently more than the outward flow, it can be said that the country has a positive investment trend and export amount, which tends to be more than the total imported goods. Initially, the complete economy tends to depend on the revenue earned by the export of oil. This could be majorly identifiable from the negative growth of the inward FDI in the year 1987, 1988 and 1989 (UNCTAD, “Investment Country Profiles Saudi Arabia”). Figure 5: FDI flows, by type of investment, 1985–2011 Sources: (UNCTAD, “Investment Country Profiles Saudi Arabia”) Saudi Arabia is majorly an oil-based economy and also enjoys a monopolistic position relating to petroleum supply. In this context, the dependency of the country in oil export has affected trade income distribution in other sectors as a whole. The balance of payment has been higher owing to the larger demand of oil all over the world, which has increased the trend of the economic growth of the country. Considering the above charts and data, it could be recognised that the oil export has been contributing to the major real income of the country. Observing the fact that the economy is majorly dependent on international income the trend of the oil expenditure is likely to increase the real income of the country. Income Distribution. The oil endowment has facilitated exceptional economic and social growth in Saudi Arabia. The socio economic development of Saudi Arabia over the period of 1999-2010, when the country achieved an annual real growth rate of 3.4% and the per capita income reached around US$16500. Moreover, the diversification of the non-oil sectors increased the per capita income of the population. Poverty reduction has been observed to be the main objective of the economic as well as social development. However, the poor distribution of the oil wealth has been observed to be the main reason instigating inequality in the income distribution. The main economic factors reflect to be the unequal distribution of wealth, imbalanced policies, low rate of development as well as the unemployment. The rising inflation rate has also catalyst the gap between the income distributions in the population of the country. The alarming rate of the poverty percentages in the population needed to be checked. About 20% of the Saudi Arabian population lives in poverty (Sara 7-10). With larger number of immigrants, the labour market has also been quiet challenging for the locale in Saudi Arabia. The enormous growth of the population has resulted in the huge population pressure on the economy of the country and has in turn catalyst the poverty level in the economy. Oil is the major source of income and in this regard, the relative growth of oil consumption has been implying a positive growth in the real income of the country (Gately, Al‐Yousef and Al‐Sheikh 1-13). Figure 6 Source:  (Gately, Al‐Yousef and Al‐Sheikh 1-13) From the above illustration, it could be majorly identified that the oil sector contributes to the real income of the country. The income is recognised to be majorly secluded within the oil sectors as compared to supplementary sectors constituting to the development of the economy. The larger sector of the labour forces is composed of people migrating into the country increasing the population as well as segregating the wage market leaving less opportunity for the locale to develop. Government intervention has positive effect on the development of the masses and Saudi Arabia has been trending to hold the rank of being the highest among minimizing the number of people lying below the poverty line. The figure 6 above suggested that with the fall in the total consumption of oil, the real income also fall. This phenomenon suggest that the oil production contributes largely to the real income of the population and hence to the income distribution also (Gately, Al‐Yousef and Al‐Sheikh 1-13; Sara 7-10). International Trade as Income Multiplier. The attainment of the balance of trade has always been a critical factor for economic development of a country. This phenomenon points towards that the fact that the continuous trends of the trade surplus or trade deficit are undesirable for an economy. At the backdrop of the economic development of Saudi Arabia the international trades multiplies the income of the country. With the massive contribution of the oil export in the GDP of the country, it can be observed that international trades acts as an income multiplier for the country. This trend has been observed in the (Figure 6), e where the real income of the country fell in the 1980s resulting from the stagnant growth of the oil sectors all around the globe. However, it could be identified that the oil and other petroleum products have been determining the country’s GDP as well as factors massively contributing to the national income of the country (Machlup 65- 85). The balance of payment shows that the total revenue earned from the export of the country has been surpassing the import. From the (Figure 5) it can be identified that the fall in the price of oil all over the world resulted in the negative trend of the balance of payment of the country. However, with the increase in the price of oil in the global market owing to its increase in the demand of oil has resulted in the elated rate of the balance of payment of the country. The diversification and export of non-oil based products in the international market have reduced the dependency of the real income on the oil sectors (UNCTAD, “Investment Country Profiles Saudi Arabia”; Gately, Al‐Yousef and Al‐Sheikh, 1-13; Sara, 7-10). The real income of the country is largely dependent on the export income making the international trade and the balance of payment the sole contributor to the real income of the country (UNCTAD, “Investment Country Profiles Saudi Arabia”). CONCLUSION The international trade as well as the balance of payment becomes one of the major contributors of the national income of any nation. This could be broadly observed from the different trading trends as well as income multiplier. It can be observed that the trade income in Saudi Arabia depends mainly on the oil producing sectors. The trend of the market suggests that the major inflow of the FDI comes from the export of the oil and other petroleum products. Again, after the downfall of the oil prices all over the world it could be observed that the country faced a major fall in their national income. Considering the threat of the circumstances that the country faced from the fall in the price of the oil, Saudi Arabia planned for diversifying products for better export mechanism. This diversification made their export market less reliant on the oil and by products for the growth of foreign investment. The sectors like telecommunication and the other services have been developed with the intention of improving the non-oil product sectors. . However, the top export products still constitutes products of petroleum. Noteworthy, Saudi Arabia has been recorded to be a country having very low number of people staying below the poverty line. This could possibly be because of the public expenditures undertaken by the government of the country to deal with the notion of eradicating poverty. Subsequently, it has also been observed that the country has a huge gap among the income of the masses. Owing to isolation of the income only in the sectors of the oil and its products, there is a high income inequality in the country. Observing the facts it could be determined that the major income of the masses comes from the oil sectors hence this could be widely discussed that there are prevalent income inequality in the country. Work Cited Alshahrani, Saad A. and Ali J. Alsadiq, “Economic Growth and Government Spending In Saudi Arabia: An Empirical Investigation.” IMF Working Paper (2014): 4-12. Print. “The World Factbook”. CIA. 2014. Web. 2 July. 2014 Credit Agricole. “Inflation.” Macro Insight 14 (2012): 12-20. Print. Gately, Dermot, Nourah Al‐Yousef and Hamad M. H. Al‐Sheikh, “The Rapid Growth of Domestic Oil Consumption in Saudi Arabia and the Opportunity Cost of Oil Exports Foregone.” Saudi Oil Consumption and Income Elasticity (2011): 1-13. “Economy & Global Trade.” Information Office. 2014. Web. 2 July 2014. Machlup, Fritz, “International Trade and the National Income Multiplier.” Library of Congress Catalogue Card Number (1961): 65- 85. Print. Olds, Gareth and Whitman College, “Saudi Trade Developments, 1980-2007.” Economics Working Paper 20 (2009): 3-10. Print. “Saudi Arabian Monetary Agency.” Research and Statistics Department. Inflation, 2010: 8-20. Web. 2 July 2014. < http://www.sama.gov.sa/sites/samaen/ReportsStatistics/ReportsStatisticsLib/5600_R_Annual_EN_2010_11_14.pdf> Sara, Fayez. Poverty in Syria towards a Serious Policy Shift in Combating Poverty. Strategic Research & Communication Centre (2011): 7-10. Print. “GDP per capita (current US$).” The World Bank Group. n.d. Web. 2 July. 2014. “Investment Country Profiles Saudi Arabia.” UNCTAD. 2013. Web. 2 July. 2014. Read More