Exploration of optimal strategies for the development of an oil-based economy: the case of Saudi Arabia

Abdulrahman Al-Tuwaijri

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This study deals with the subject of development planning in the oil-based economy of Saudi Arabia. The main objective was to explore optimal strategies for the development of the Saudi economy. That was done through the development of a two-sector planning model. The model is a long-run optimal planning model using the technique of dynamic linear programming. The structure of the model involves an objective function and a set of constraints. The objective function reflects the main goal of the development planning of Saudi Arabia, which emphasizes the development of the nonoil sector, and the constraints are specified through a two-sector macroeconomic model. The results of solving the model give optimal values of the endogenous variables at the beginning of different discrete intervals. Each interval is five years. The base year is 1980 and the terminal year is 2014. The model assumes a lifetime of the oil resource extraction which is compatible with the long-term strategy of developing the nonoil sector;The results of the optimization indicated the possibility of developing a nonoil sector in the oil-based economy, but that requires a high level of investment compared with production in the nonoil sector for a long time. It also indicated the continuous dependence of the nonoil sector on expatriate labor in the future. This conclusion emphasizes how careful the country should be when designing any policy to limit foreign labor, and the urgency of increasing the participation in the labor force of Saudi citizens, including women. The two-sector model developed could be a helpful tool to explore the long-run perspective of intertemporal investment strategies of the Saudi economy given the lifetime of the oil resource.

Date: 1985-01-01
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