The Saudi Arabian Quandary: The Economy's Inability to Sustain Growth

Robert Looney


Before the recent surge in oil prices, the Saudi Arabian economy was showing signs of slow-down and stagnation. The economy appeared incapable of sustaining growth without a rising infusion of oil revenues. The purpose of this paper is to identify the main factors responsible for the on-going economic deterioration. An analysis of government expenditures suggests a major factor responsible for the country’s economic decline is deterioration in the links between government expenditures and the non-oil sectors of the economy. In large part, the declining effectiveness of government expenditures in stimulating private sector activity can be attributed to the high priority the government gave to social expenditures and defense. The implications are that if the economy is to achieve self-sustained growth independent of developments in the oil sector, government expenditures will have to be refocused on activates that directly support private sector investment. The welfare state will have to be scaled back and a higher priority given economic allocations. More emphasis must be placed on efficiency and productivity in government activities.

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