Economic Development in Saudi Arabia and Iran - Essay Example

Introduction The Persian Gulf region contains the largest reserves of total world oil production, with countries like Saudi Arabia and Iran etc being the prominent producers in the region. Despite the wealth of oil explored in the region and exported to consumer countries for heavy revenues, there happen to be a remarkable fact that economies of these countries are characterized with backwardness. These countries still face the issues like falling per capita income, low GDP, high unemployment and poverty. This paper illuminates the state of economic development in both the countries and presents a comparative analysis of the causes of economic backwardness. It also proposes strategies that should be adopted by both the countries so as to pave way for economic growth. Economic Development Issues in the Persian Gulf- Saudi Arabia and Iran Saudi Arabia and Iran are the two remarkable producers of oil in the region but have failed to utilize this wealth of natural resources towards economic development of the country. It is a tragedy of oil-based economies that they fail to reap the benefits of this rich and valuable resource. There may be several reasons behind this fact viz. extreme reliance on oil export for revenue generation and political instability etc. Regional instability is also one of the major phenomena that strike the oil rich countries in the Persian Gulf region. The fear of neighboring rivalries and potential threats keep these countries engrossed in spending thriftlessly on defense and military buildup, which has been on an ever increasing trend in the Persian Gulf region. Billion and Khatib also say that "the economy and politics of oil-dependent states are also affected by their propensity to spend more on defense" (113). Ever since the Iranian revolution, Saudi Arabia has considered Iran as a severe threat to its political structure. Consequently, both the countries, in particular Saudi Arabian government allocates heavy budget to arms accumulation and military buildup rather than on economic development. Saudi Arabia happens to be richly endowed with the wealth of oil reserves that serve as the backbone of economies of industrialized world. Bremmer says that "not only does Saudi Arabia export more oil than any other producer, a fourth of the world's known reserves lie beneath its soil; the reserves of Russia, Nigeria, and Alaska together do not match the desert kingdom's" (23). Despite that, the country's economic growth and stability seems to be deteriorating in the recent times. Like most of the oil-based economies, the country's economic condition is bound to improve with a rise in oil price and decline with a fall in oil price. The economy of Saudi Arabia has moved drastically over the past two decades with the movements in oil price. The rich Arab country is now falling short of enough funds to finance its major public and welfare expenditures mostly because of the events that took place over the last few decades. Saudi government had to bear extraordinary expenses during the Gulf War at officially disclosed $55 billion and then due to provision of financial support to Iraq during the Iran invasion amounting to $26 billion. Furthermore, the fluctuations in price of oil over the last 20 years from $40 per barrel in 1981 to below $20 per barrel until the late 90s have affected the cash flowing in the country. Saudi government has also failed to stabilize its expenditures based on oil prices despite its ever increasing reliance on oil to finance these expenses. Because of this reliance on oil, the oil price crisis in 1998 profoundly affected the Saudi economy and increased the level of domestic and international debt leading to a financial crisis (Gause 82-83) The Saudi economy is under the serious threat of unemployment due to inability of the government to provide employment to an increasing number of educated youth. Public sector of the economy is already confronting with high salaries burdening the fiscal budget whereas the private sector is more willing to employ foreign workers because of low wages. The government has remained seriously unable to accommodate the needs of growing population and its infrastructure, especially the water and electricity sectors, require further investment. Furthermore, the political structure of Saudi government does not allow it to bring rigorous changes to the country's economic model for example lessening the burden on fiscal budget by decreasing the salaries of government officers or privatization of loss-bearing public industries (Gause 84) Iran also produces substantial quantity of oil and has a great capacity of untapped oil beneath its soil. However, the country is far behind the Saudi Arabia in terms of economic development and stability. Iran's economy is characterized with low per capita income, high rates of poverty, high unemployment rates and inevitable external pressures. Iran has not been as fortunate as the Saudi Arabia with regard to wealth and heavy oil revenues. The economy of Iran has undergone severe changes after the 1979 revolution. Alizadeh says that "the economy not only endured the effects of disruption of the revolution itself, but also the protracted and costly war with Iraq, a continuing economic embargo by the United States and erratic oil prices" (2). Revolution disconnected the relationship of Iran with the United States leading to heavy sanctions and embargoes restricting the economic growth of the country. Whatever oil it produces is still subject to shocks in oil prices which have seriously affected the economy over the past few decades. Iraq's invasion supported by Saudi finance proved to be even costlier for Iran and pushed the country to increase expenditure on military buildup and nuclear development. The economy of Iran had been showing impressive progression until the late 70s. Iran's per capita GDP in the year 1975 was $184 which declined to about 176 in 1990. Most of the country's economic deterioration took place as a response to revolution (Alizadeh 32). It is mostly due to the fact that during Shah's regime, the country enjoyed intimate and strategic relationship with the United States and its regional neighboring countries. There were no sanctions, less fears of regional rivalries and thus the economy flourished as the oil revenues flowed in. Comparatively, Iran's capacity to produce oil and the country's economic conditions are far behind that of the Saudi Arabia. Iran's economy has undergone several shocks; external in terms of US embargoes and internal in terms of revolution, which is certainly not the case with Saudi Arabia. The Saudi government, therefore, can bring about changes in internal expenditures to cope with the challenges of its oil-based economy and even gain US support in doing so. Iranian government, on the other hand, has no such options because most of the pressures that confront its economy are of external nature. In order to promote economic development and stability, Saudi Arabia seriously needs to restructure its economy. The restructuring needs to be done in a way that Saudi government may be able to reconcile the major expenditures with oil price. Saudi Arabia's entire economy is based solely upon the oil revenues that are gained on exports. Historically, the economy has undergone several fluctuations due to changes in oil price and it is expected that if the country's economic structure remains the same, any future changes in oil price would cause severe slump in the economy. Gause also propounds that "without change in the underlying structures of the Saudi economy, the next oil price decline will trigger an even worse fiscal crisis for Riyadh" (93). It is a major phenomenon in any oil-based economy that its richness in natural wealth becomes detrimental to its economic stability and growth. It is also very important for Saudi Arabia to foster the private sector of its economy and provide subsidies to small and medium private business and industries so as to ensure a growth in the employment rate and consequently the stability of political regime. The country is extremely reliant on oil exports and revenues, only establishment and growth of private sector industries would lead the country to resist the economic pressures brought about by fluctuations in oil price. Bremmer illuminates that "promoting a dynamic private sector is crucial for Saudi Arabia, particularly because the slump in employment and non-oil growth derives from the decline over time in the government's ability to stimulate private-sector growth with its own oil generated revenues." (28) For Iran, it is very important to reconsider its foreign policies, especially the country's relationship with the United States and the regional neighboring countries. The greatest issue confronting the country is isolation from the international arena. Iran can help its economy grow by further exploration and export of oil to several consumer countries in the world but the US led sanctions hamper the way. The establishment of construction and other industries in Iran could also lead to alleviation of poverty and unemployment in the country. An improvement in relations with the US is likely to open way for the economy to grow. Conclusion This paper discusses the historical and current causes of economic backwardness in Saudi Arabia and Iran, despite these countries' abundant oil resources. Although not all the factors causing economic issues in these countries are of similar nature but the issue that remains critical on both the sides happen to be a sheer dependence of these economies on oil revenues that are largely affected by fluctuations in oil prices. Regional instability also causes an increase in defense expenditures and reduction in spending on economic development. Saudi Arabia mostly confronts issues based on its political and economic structure which can be resolved by taking steps to bring changes internally. However, in the case of Iran, important factors like US sanctions and regional rivalries are the issues that put external pressures on the economy. Iran, therefore, first needs to improve its relations with the United States as well as its neighboring countries so as foster economic stability and initiate growth. Works Cited Alizadeh, Parvin, The Economy of Iran: dilemmas of an Islamic State, I.B. Taurus Publishers, 2001 Billion, L. Philippe and Khatib, Fouad E., From Free Oil to Freedom Oil: Terrorism, War and US Geopolitics in the Persian Gulf, Geopolitics, 2004, 9(1), 109-137 Bremmer, Ian, The Saudi Paradox, World Policy Journal, Fall 2004, 21(3), 23-30 Gause, F. Gregory, Saudi Arabia over a Barrel, Foreign Affairs, May/June 2000, 79(3), 80-94 Read More