THE IMPACT OF GOVERNMENT EXPENDITURES IN THE TRANSFORMATION PROCESS OF A TRADITIONAL ECONOMY: A CASE STUDY OF SAUDI ARABIA

Saudi Arabia has been a modern political entity for less than 50 Years. As an oil-exporting country for four-fifths of this period, its non-oil economy may be described as of the 'traditional' subsistence type up till 1965; in 1970, it adopted development planning as an overall mechanism to change the basic structure of its economy. The increase in the price of oil in 1973/74 and in 1979/80 gave Saudi Arabia vast financial resources that enabled it to spend substantial amounts on its economic development while accumulating large foreign monetary assets.; This study derives its orientations from Professor Hirschman's perception of development as the record of 'how one thing leads to another' and from his generalized formulation of the concept of 'linkages'; it selects for analysis one aspect of linkages which are related to oil-derived national revenues and the manner in which these are channeled into the development of the domestic non-oil economy and describes these as 'fiscal linkages'; it, then, focuses on the impact of fiscal linkages on domestic capital formation as one way toward an understanding of the process of economic development in Saudi Arabia, and implicity in most capital-surplus oil-exporting economies during the period of export-led growth. In these economies fiscal linkages are large enough and are activated by governments as development mechanisms, and for the purpose of long-term diversification away from the dominant crude oil exports.; The principal hypothesis investigated in this study is whether or not fiscal linkages induced by government oil revenues and expenditures in Saudi Arabia had a positive impact on Saudi private sector domestic capital formation during the period of development planning (1970-80). The study shows that such linkages did increase private domestic capital formation; private fixed investment more than tripled during the period 1973-79. This development is mainly attributable to intersectoral effects associated with increased government revenues and expenditures stemming from direct government investment in the domestic economy, indirect investment in support of private commercial and industrial activities (aided by the formation of five state-sponsored development banks) and distributional aspects of government expenditures. However, in order to fulfill the medium to long-term objectives of economic diversification, private investment needs to be channeled more into productive activities.