Although many factors have contributed to the economic development strategies of both Saudi Arabia and the UAE, this analysis will briefly describe the political and economic history of the countries before further analyzing the success or failure of a free market economy, a budget that emphasizes capital, an entrance into the world economy, and the allocation of government revenue in each. The economic shortcomings of Saudi Arabia and accomplishments of the UAE point to the conclusion that the UAE has implemented, and continues to implement, more successful economic development strategies than Saudi Arabia.
Saudi Arabia was historically a land in which its people lived off herding flocks or raising dates or other crops. A 1938 discovery of oil in Hasa began the country�s walk into years of wealth with the production and export of oil. In the 1950s, oil production increased 20 percent each year. This brought increased revenue and thousands of jobs in the industry, as well as new public buildings, education, health services, highways, and foreign exchange to buy cars, food and appliances. The Saudi Arabian Monetary Agency (SAMA) was created to provide modern control over national finances. Aramco employment reached its peak, bringing not only increased revenue, but also building a hospital, clinics, schools, housing, agriculture, and railroads. (Russell 200)
In 1953, however, King Al-Aziz died and his son Saud took over; Saud didn�t understand the modern world. A 1958 financial crisis resulted from irresponsible overspending and a political crisis with the UAR. Saud let his brother, Prince Faisal, take charge of government affairs. Until this point, government funds were dispersed according to the wishes of the king, but Faisal introduced a financial system with a government budget and allowances for royal family members.
However, the waste of money did not end completely. In 1964, Faisal gained complete control and greatly increased budgets for education, medical care, and transportation facilities. He worked to make the political system more honest and efficient. (Russell 201)
In 1973 Arab-Israeli Oil proclaimed an embargo on oil to the U.S. and reported a 10 percent cut in Saudi oil exports. This tightened world oil supplies and caused the Organization of the Petroleum Exporting Countries (OPEC) to raise the price of oil 400 percent, dramatically increasing Saudi Arabia�s oil revenue. The 1970s government offered incentives to non-oil industries. Factories appeared and companies joined ventures with foreign firms. (Russell 202).
In 1982 Abdullah became crown prince. The �80s brought a decline in oil revenue, diminishing government subsidies. Abdullah continued planning for increasing military strength, spending over a quarter of the gross national product on defense. The country grew tired of being a swing producer, accounting for other OPEC members� over-production. It began its own rapid over-production, causing an extreme low in oil prices and revealing the need for stricter discipline within OPEC. The recession conditions of the late �80s brought government revenues and foreign assets to an all-time low. (Russell 202)
In the 1990s oil funded most of the government budget and made up 99 percent of all exports, supplying world needs during the Gulf crisis. Rapid industrial development centered on petrochemicals, which depends on oil as a raw material. During the Iraqi invasion of Kuwait, however, the threat of Saddam�s increased reserves forced Saudi Arabia to pledge money for military allies. By 1995 the national debt reached US$70 billion. (Russell 207). Increasingly desperate, with its only hope in oil, Saudi Arabia cooperated with Iran in OPEC to raise the price of crude oil. Abdullah called for reform of bureaucracy and wasteful spending, saying the days of easy living off oil revenues had ended. He promised larger roles for private companies in the future and welcomed proposals for investment in the energy sector. (Russell 206)
Unfortunately, such initiatives are few and far between and seemingly too late. As of 2000, the gross domestic product was US$125 billion, but the gross GDP per capita was only US$7,000. (Russell 199) Saudi Arabia�s historic dependence on oil has cost the country greatly.
Today the Saudi government is constricting growth of a free market, poorly prioritizing government funds, and shying away from the world economy.
Because of Saudi Arabia�s history of a strong ruling family and an oil boom that allowed the national government to fund everything, the country has delayed in developing a free market and fostering privatization. �[The ruling family] would rather use state-lead economic diversification that may reach upwards of US$100 billion over the next twenty years. And the country's national debt is already over 100 percent of GDP (Looney).� Therefore, major reforms that could fund activities directly supporting private sector investment have been disregarded. �Sooner or later, government expenditures will have to be refocused on activities that directly support private sector investment . . . An environment that encourages investment and provides better incentives for risk taking and job creation must be created (Looney).�
The Saudi government�s inability to foster a free market economy has led to a decline in production across the board. Since 1985, private sector output has declined gradually, leveling off at around 48 percent of output. The public sector�s share and the oil sector�s share have consistently been about 18 and 35 percent, respectively, since 1983 and 1990, respectively. (Looney). This illustrates the incapability of the private sector to preserve high rates of prolonged growth.
Many other sectors have become almost completely dependent on private sector expenditures, including the non-oil manufacturing sector, the wholesale and retail trade sectors, and the service sector. Housing, transport, storage, and communications sectors also rely heavily on private sector expenditures. (Looney)
Unfortunately, it is unlikely that private sector spending be sustained without a steady infusion of government expenditures. Therefore, the deterioration in links between government spending and the rest of the economy is critical. A look at the reasons for such deterioration reveals another problem in the Saudi government�s economic policies, namely the allocation of the government funds. �Given the fall in the relative share of government expenditures in such areas as non-oil GDP, diminishing returns can no doubt be ruled out [as a factor in the deterioration in links between government expenditures and the rest of the economy]. A more likely source of the decline in the strength of public sector linkages appears to be the major changes in the composition of the government's budget (Looney).�