Durham E-Theses The private sector and the state in Saudi Arabia. Malik, Monica How to cite: Malik, Monica (1999) The private sector and the state in Saudi Arabia., Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/1651/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk THE PRIVATE SECTOR AND THE STATE IN SAUDI ARABIA BY MONICA MALIK SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF DURHAM CENTRE FOR MIDDLE EASTERN AND ISLAMIC STUDIES The copyright of this thesis rests with the author. No quotation from it should be published without the written consent of the author and information derived from it should be acknowledged. DECEMBER 1999 18 OCT 2000 Table of Contents List of Tables, Charts and Figures viii Acknowledgements x Declaration and Statement of Copyright xii Abstract xlii Chapter One: Introduction 1.1 Objectives of the Study 1 1.2 Structure of the Thesis 3 1.3 Methodology and Sources 5 1.3.1 Interviews 6 1.4 Data Limitations 8 Chapter Two: The Engine for Economic Growth: State, Private Sector & their Relationship 2.1 Introduction 9 2.2 Historical Background to Development Theories 11 2.2.1 Keynesian Development Policies (1945-1975) - State-Led Development 11 2.2.1.1 Stages of Growth Model 13 2.2.1.2 Modemisation Theories 14 2.2.1.3 Import Substitution Industrialisation 16 2.2.1.4 Conclusion 21 2.2.2 The Neo-Classical School of Development - Market-Oriented Development 22 2.2.3 Conclusion 29 2.3 Models for the Relationship Between the State and the Economy: The Depth of State Intervention 30 2.3.1 Minimal State 32 2.3 Market Failure and State Intervention 33 2.3.2 State Aided Capitalism (SAC) 35 2.3.2.1 Implication of Minimum State and SAC 38 2.3.3 State Sponsored Capitalism (SSC)- The State is the Main Agent Of Growth 39 2.3.3.1 Case Study - Taiwan 40 2.3.3.2 Case Study - France, Dirigism 45 2.3.4 Conclusion 46 2.4 Models For the Relationship Between the State and the Economy: the Quality of Intervention 47 2.4.1 The Predatory State 49 2.4.2 The Developmental State 51 2.4.3 The Intermediate State 52 2.4.4 The Rentier State 53 2.4.5 Conclusion 57 2.5 Conclusion 57 Chapter 3: The Saudi Arabian Economy 3.1 Introduction 59 3.2 The Saudi Arabian Economy Until End-1950's 60 3.3 The Economic Development from 1960 - 1973 63 3.3.1 Overall Economic Development and the Emergence of Planning 63 3.3.2 The First Development Plan (1970-1975) 65 3.4 An Overview Of The Developments in the Saudi Arabian Economy After 1973 68 3.5 The Boom Years: 1973 - 1981 70 11 3.5.1 The Second and Third Five Year Development Plans 70 3.5.2 Performance of the Saudi Economy During the Boom Years 76 3.5.2.1 General 76 3.5.2.2 The Budget - Government Revenue and Expenditure 77 3.5.2.3 The Structure and Growth of the Economy 80 3.5.2.4 The Balance Of Payments and Trade 83 3.4.2.5 Problems Faced by the Economy 86 3.6 The Recession Years: 1982 - 1989 88 3.6.1 The Fourth Five Year Development Plan 88 3.6.2 The Preformance of the Economy During the Recession Years 90 3.6.2.1 General 90 3.6.2.2 The Budget - Government Revenue and Expenditure 90 3.6.2.3 The Structure and Growth of the Economy 92 3.6.2.4 The Balance of Payments and Trade 96 3.7 A Period of Mixed Growth: 1990— Present 100 3.7.1 The Fifth and Sixth Five Year Development Plan 100 3.7.2 Performance of the Economy Since 1990 103 3.7.2.1 General 103 3.7.2.2 The Budget - Govermnent Revenue and Expenditure 103 3.7.2.3 The Growth of the Economy 107 3.7.2.4 The Balance of Payments and Trade 109 3.8 Conclusion 113 111 Chapter Four: A Background to the Nature and Development of the Saudi Arabian Private Sector 4.1 Introduction 115 4.2 Defining the Private Sector in Saudi Arabia 117 4.3 The Role of The Private Sector in the Economy 126 4.3.1 The Expanding Role of the Private Sector in the Development Plans 126 4.3.2 Govermnent Approaches to Improve the Role of the Private Sector and to Liberalise the Economy 128 4.3.2.1 Privatisation 129 4.3.2.2 Reduced Subsidies 132 4.3.2.3 Joining the World Trade Organisation 133 4.3.2.4 Saudiisation 134 4.4 Development & Growth of the Private Sector 136 4.4.1 Percentage Share of the GDP & Growth Rates of the Private Sector 137 4.4.2 Private Sector Investments 145 4.4.3 Private Sector Employment 149 4.4.4 Number Of Companies 152 4.4.5 Private Sector Exports 153 4.5 Main Areas of Private Sector Activity 155 4.5.1 The Industrial Sector 156 4.5.1.1 Private Industrial Development Companies 165 4.5.1.2 Government Encouragement to Private Sector Industry 166 4.5.1.3 Small Industries 171 4.5.2 The Agricultural Sector 174 iv 4.5.2.1 The Main Agricultural Products 176 4.5.2.2 Government Support For Agriculture 178 4.5.3 The Service Sector 180 4.5.3.1 The Distributive Trades (Wholesale And Retail) and Hotel Sector 183 4.5.3.2 The Banking Sector 186 4.5.3.3 Government Encouragement to Private Sector Involvement in Services 189 4.6 Conclusion 191 Chapter Five: Perceptions of the Private Sector on their Role in the Economy and Relationship with the State 5.1 Introduction 193 5.2 General Issues Related to Private Sector Development 194 5.2.1 The Government's Motivation in Promoting the Private Sector to Take The Lead in the Economy 195 5.2.2 The Ability of the Private Sector to Lead Economic Development 197 5.2.3 The Gains in Independence of the Private Sector 203 5.2.4 Conclusion 206 5.3 Issues Relating to Efficiency in the Saudi Arabian Private Sector 208 5.3.1 Greater Efficiency of the Private Sector Compared to the Public Sector 209 5.3.2 The Efficiency of the Saudi Private Sector Compared to International Standards 210 5.3.3 Variations of Efficiency within the V Private Sector 211 5.3.4 Problems of the Private Sector Linked with Management Capabilities 213 5.3.5 The Impact of Family Businesses on Efficiency 216 5.3.5.1 Possible Solutions to Deal with the Challenges of Family Businesses 219 5.3.6 The Benefits of Foreign Partners 222 5.3.7 Conclusion 224 5.4 The Business Environment and the Needs of the Private Sector 225 5.4.1 The Macro Business Climate 226 5.4.2 The Education System 228 5.4.3 The Legal System 231 5.4.4 Crony Capitalism 236 5.4.5 The Financial System 241 5.4.6 Infrastructure 245 5.4.7 Bureaucracy and Regulations 247 5.4.8 Lack of Information 252 5.4.9 Conclusion 254 5.5 Government Policies Affecting the Private Sector * 255 5.5.1 Privatisation 255 5.5.2 Saudi Arabia Joining the WTO 259 5.5.3 Saudiisation 265 5.5.4 Conclusion 268 5.6 Private Sector - Government Relations 269 5.7 Conclusion 271 Chapter Six: Conclusion 6.1 Introduction 275 vi 6.2 The Depth of State Intervention in Saudi Arabia 275 6.3 The Quality of State Intervention in Saudi Arabia 277 Appendix One 284 Appendix Two 288 Bibliography 301 VII Tables, Charts and Figures. Chapter Two: The Engine For Economic Growth: State, Private Sector & Their Relationship Figure 2.1 Implementing Private Sector Development 26 Figure 2.2 Function of the State 31 Figure 2.3 Market Failure and State Intervention 33 Chapter 3: The Saudi Arabian Economy Table 3.1 Distribution of Financial Allocation for the First Development Plan 67 Table 3.2 Total Government Expenditure on Development 72 Table 3.3 Allocation of Government's Development Expenditure in the Third Plan 74 Table 3.4 Government Expenditure, GDP and Investment 76 Table 3.5 Crude Oil Prices, Production and Exports from Saudi Arabia 77 Table 3.6 Budgeted and Actual Revenues and Expenditures 78 Table 3.7 The Saudi Budget (1974-198 1) 79 Table 3.8 Gross Domestic Product by Type of Economic Activity (1969-198 1) 81 Table 3.9 Percentage Growth Rates of GDP and Economic Sectors (1970-1982) 82 Table 3.10 Balance of Payments, unent Account (1972-198 1) 84 Table 3.11 Percentage Distribution of Merchandise Exports by Major Commodity Group (1970-198 1) 85 Table 3.12 Annual Rates of Money Supply (1970-1984) 87 Table 3.13 The Saudi Budget (1982-1993) 91 Table 3.14 Percentage Growth Rates of GDP and Economic Sectors (1983-1990) 93 Table 3.15 Gross Domestic Product by Type of Economic Activity 94 Table 3.16 Balance of Payments, Current Account (1982-1989) 97 Table 3.17 Percentage Distribution of Merchandise Exports By Major Commodity Groups 98 viii Table 3.18 Saudi Arabian Budgetary Developments (1992-1998) 105 Table 3.19 Ratio of Budget Deficit to GDP 106 Table 3.20 Growth Rates of GDP 108 Table 3.21a Balance of Payments, Current Account (1990-1992) 110 Table 3.2 lb Balance of Payments, Current Account (1993-1997) 110 Table 3.22 The Government's Domestic and Foreign Debt 111 Table 3.23 Non-Oil Exports 112 Chapter Four: A Background to the Nature and Development of the Saudi Arabian Private Sector Table 4.1 Leading Merchant Families and Wholesale Trading Houses in Saudi Arabia 118 Table 4.2 International Assets of Prince Alwaleed Bin Talal 125 Table 4.3 Civilian Employment of the Sixth Development Plan 135 Table 4.4 Major Indications of Private