Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia Policy Recommendations for www. Economic Development in Priority Areas of the Kingdom ksp of Saudi Arabia .go.kr 2011 Ministry of Strategy and Finance, Republic of Korea Government Complex 2, Gwacheon, 427-725, Korea Tel. 82-2-2150-7732 www.mosf.go.kr Korea Development Institute 130-740, P.O.Box 113 Hoegiro 49 Dongdaemun-gu Seoul Tel. 82-2-958-4114 www.kdi.re.kr Knowledge Sharing Program Center for International Development, KDI 2011 ● P.O. Box 113 Hoegiro 49 Dongdaemun-gu Seoul, 130-740 MINISTRY OF STRATEGY ● Tel. 02-958-4224 AND FINANCE Korea Development Institute ● www.ksp.go.kr Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia Project Title Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia Prepared by Korea Development Institute (KDI) Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Prepared for Government of the Kingdom of Saudi Arabia In cooperation with Ministry of Economy and Planning, Kingdom of Saudi Arabia Program Directors Kwang-Eon Sul, Former Managing Director, Center for International Development (CID), KDI MoonJoong Tcha, Managing Director, CID, KDI Taihee Lee, Director, Policy Consultation Division, CID, KDI Program Officer Mikang Kwak, Research Associate, Policy Consultation Division, CID, KDI Project Manager Hyung Koo Lee, Former Minister of Labor Authors Chapter 1: Hyung Koo Lee, Former Minister of Labor & Dongseok Kim, Senior Research Fellow, KDI Chapter 2: Chang Hwan Kim, Senior Research Fellow, Korean Educational Development Institute & MoonJoong Tcha, Senior Research Fellow, KDI Chapter 3: Jaejoo Ha, Vice President, Korea Atomic Energy Research Institute Chapter 4: Chang Seob Kim, Professor, Kyungwon University English Editor Minah Kang, Freelance Editor Eun Hae Kim, Freelance Editor Government Publications Registration Number 11-1051000-000155-01 ISBN 978-89-8063-537-5 93320 Copyright ⓒ by Ministry of Strategy and Finance, the Republic of Korea Knowledge Sharing Program Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia 2011 MINISTRY OF Korea Development STRATEGY AND FINANCE Institute Preface In the 21st century, knowledge is one of the key determinants of a country's level of socio-economic development. Based on this recognition, Korea's Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) and the Korea Development Institute (KDI). KSP aims to share Korea's development experience and knowledge accumulated over the past decades to assist socio economic development of the partner countries. Former high ranking government officials are directly involved in policy consultations to share their intimate knowledge of development challenges, and they complement the analytical work of policy experts and specialists who have extensive experience in their fields. The government officials and practitioners effectively pair up with their counterparts in development partner countries to work jointly on pressing policy challenges and share development knowledge in the process. The Program includes policy research, consultation and capacity building activities, all in all to provide comprehensive, tailor made assistance to the partner country in building a stable foundation and fostering capabilities to pursue self sustainable growth. Year 2010 is the first to conduct Knowledge Sharing Program with the Kingdom of Saudi Arabia (KSA). Written demand survey forms were submitted by the Ministry of Economy and Planning of the KSA via official channels throughout 2009. Upon the request, 2010 KSP with the KSA was launched in May 2010 focusing on the following four areas: Enhancing the Effectiveness of the Implementation of Economic Development Plans; Improvement of Primary Education; Nuclear energy development with special focus on institutional and technological capacity enhancement; and Introduction of a Smart Grid System. 04 Policy Recommendations for Economic Development in Priority Areas of the Kingdom of Saudi Arabia I would like to take this opportunity to express my sincere gratitude to Project Manager, Dr. Hyung Koo Lee, and all the fellows including Dr. Dongseok Kim, Dr. MoonJoong Tcha, Dr. Jaejoo Ha, Dr. Chang Hwan Kim, and Dr. Changseob Kim for their immense efforts in successfully completing the 2010 KSP with the KSA. I am also grateful to Managing Director Dr. Kwang- Eon Sul, Program Directors Mr. Taihee Lee, Dr. Wonhyuk Lim and Program Officer Ms. Mikang Kwak, all of the members of the Center for International Development, KDI, for their hard work and dedication to this program. Lastly, I extend my warmest thanks to the Ministry of Economy and Planning of the KSA, related Saudi government organizations, program coordinators and participants for showing active cooperation and great support. In your hands is the publication of the results of the 2010 KSP with the KSA. I sincerely hope the final research results including policy recommendations on the selected areas could be fully utilized to help the KSA in achieving economic development in priority areas in the near future. Oh-Seok Hyun President Korea Development Institute 05 Preface Contents 2010 KSP with the Kingdom of Saudi Arabia ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙22 Executive Summary ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙25 Chapter 01 Enhancing the Effectiveness of the Implementation of Economic Development Plans 1. Brief Review of Saudi Arabian Economy ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙38 1.1. Territory and Population ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙38 1.2. Economic Growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙39 1.3. Industrial Structure ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙44 1.4. External Transaction ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙46 1.5. Consumption and Investment ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙48 1.6. Inflation ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙49 2. Development Planning in Saudi Arabia ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙49 2.1. Brief History∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙49 2.2. Evaluation of Saudi Arabia's Development Plans ∙∙∙∙∙∙∙∙∙∙∙∙∙52 3. Significance and Characteristics of Economic Development Plans ∙∙∙∙∙∙∙55 3.1. Economic Development Plans in Market Economy ∙∙∙∙∙∙∙∙∙∙∙∙55 3.2. General Characteristics of Economic Development Plans in Market Economies∙∙∙56 3.2.1. Discrepancy in Perception among Economic Agents ∙∙∙∙∙∙∙∙∙56 3.2.2. Discrepancy in Perception inside the Government ∙∙∙∙∙∙∙∙∙∙56 3.2.3. Discrepancy between Aggregate and Sectoral Plans ∙∙∙∙∙∙∙∙∙57 3.2.4. Discrepancy between Plan and Implementation ∙∙∙∙∙∙∙∙∙∙∙57 4. Implementation of Development Plans ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙57 4.1. Legal Status of Development Plan ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙58 4.2. Implementation Governance∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙58 4.3. Implementation Scheme ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙58 4.4. Coordination between Plan and Annual Budget∙∙∙∙∙∙∙∙∙∙∙∙∙∙58 5. Korea's Development Plans ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙59 5.1. Chronological Review of Korea's Economic Development Plans ∙∙∙∙∙∙60 5.1.1. The Situation before the Economic Development Plan (1945-1961) ∙∙∙60 5.1.2. Launching the Economic Development Plan (1962-1971) ∙∙∙∙∙∙∙61 5.1.3. Establishing a Self Reliant Industrial Structure (1972-1979) ∙∙∙∙∙∙62 5.1.4. Economic Stabilization Policy (1980 -1987) ∙∙∙∙∙∙∙∙∙∙∙∙∙65 5.2. Implementation and Execution ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙65 5.2.1. Implementation Governance ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙66 5.2.2. Implementation Scheme ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙68 6. Advice and Recommendations ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙69 6.1. Strong Implementation of Development Plans ∙∙∙∙∙∙∙∙∙∙∙∙∙∙70 6.2. Strong Leadership of the Top Leader ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙70 6.3. Functions of the Planning Center and its Strong Position inside the Government ∙∙70 6.4. Professional Research Institution ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙71 6.5. Enhancing the Functions of Market System ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙71 6.6. Indicative Planning ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙72 6.7. Reconciliation of Macro Plan with Sectoral Plans ∙∙∙∙∙∙∙∙∙∙∙∙∙72 6.8. Rolling Plan System ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙73 6.9. Concrete Plan ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙93 References ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙75 Chapter 02 Improvement of Primary Education of the KSA 1. Education and Economic Development ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙78 1.1. How does Education Affect Economic Growth? ∙∙∙∙∙∙∙∙∙∙∙∙∙∙78 1.1.1. The Mechanism of Economic Growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙78 1.1.2. Channels Education Affects Economic Growth ∙∙∙∙∙∙∙∙∙∙∙80 1.1.3. Education Reducing Social Costs from Conflicts∙∙∙∙∙∙∙∙∙∙∙81 Contents 1.2. Contribution of Education to Growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙83 1.2.1. Contribution of Education to Growth - the US Case ∙∙∙∙∙∙∙∙∙83 1.2.2. Contribution of Education to Growth - Many Country Cases ∙∙∙∙∙∙84 1.2.3. Education and Socio-economic Variables∙∙∙∙∙∙∙∙∙∙∙∙∙∙87 1.3. Education as a Factor of the Asian Miracle∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙89 1.3.1. The East Asian Miracle and the Importance of Education ∙∙∙∙∙∙∙89 1.4. Education and Growth - The Korean Case ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙90 1.4.1. Correspondence between Development and Education ∙∙∙∙∙∙∙∙90 1.4.2. Contribution of Education to GDP Growth∙∙∙∙∙∙∙∙∙∙∙∙∙∙93 1.4.3. How to Increase Investment in Education? ∙∙∙∙∙∙∙∙∙∙∙∙∙94 1.5. Implication for the KSA ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙95 2. Korean Educational Development and Its Strategies∙∙∙∙∙∙∙∙∙∙∙∙∙∙99 2.1. Historical Development ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙99 2.2. Development Strategy ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙101 2.2.1. The Expansion of Educational Opportunities and Quantitative