A diversification policy model for the Saudi Arabian economy (CGE model)

Scope of study. The Saudi high dependency on oil exports as a major source of income and exchange earnings resulted in a series of external shocks during the past six years when the price of oil fell below ten dollars per barrel in 1985. This caused the country to experience a severe reduction of foreign exchange on which infrastructural development and production depended. As a result, the growth rate of the economy slowed. Since then, the central concern among the Saudi Arabian planners and policy makers has been: "What will happen when the oil runs out or the world no longer needs it?" Therefore, recent development plans have focused on economic diversification as a strategy to increase the production of non-oil sectors. One of the main purposes of this dissertation is to find a theoretical definition for diversification and review some of the policies that were used in this regard. Thus, a CGE model was developed to analyze the effects of various trade and incentive policies aimed at diversifying the economic structure of Saudi Arabia such as tariffs, exchange devaluation, and subsidies. Our analysis focused on the effect of these policies on non-oil output, export, and foreign imports.;Findings and conclusion. The conclusion that can be drawn from this study, is that trade policies, particularly exchange devaluation policy, can be used in Saudi Arabia to increase the export of non-oil sectors. The study also confirms the findings of other studies in the development literature, that an export promotion strategy is superior to import substitution or protection strategy in terms of non-oil output, non-oil export, GDP and private income. These findings suggest that it is beneficial for Saudi Arabia to use trade policy, especially those that are pro-export promotion, to diversify its economic base and reduce its dependency on oil.