Standard Economic Sustainability Indicators To Saudi Arabia Economics Essay

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Being the largest crude oil exporter in the world has provided Saudi Arabia a continuous flow of revenue estimated at around 311 billion for 2012 EIA, 2012. The Saudi government has been spending for the past decades a considerable portion of its revenue into improving the standard of living of its citizens. The Ninth Five-Year Plan initiated in 2009 allocated more than 380 billion $ to develop the nation's educational abilities, social and healthcare welfare, transportation system and resolve recurrent housing scarcity (MEP, 2009). Assessing the sustainable success of those development policies is a hard endeavor which requires extensive efforts. A very common way to evaluate economic sustainability is through indicators that were first implemented by UNCSD and Eurostat two decades ago. However as attractive as those indicators may look like, applying them to the Saudi Arabian context offers its own challenges and shortcomings. In this paper, we will define sustainable economic development (SED), explain the indicators that are used to measure sustainability and appraise their applicability for Saudi Arabia.

2-Defining Sustainable Economic Development:

2.1-Economic development and economic growth: Two sundry concepts

It has become recently common practice among researchers to use both the expressions of economic growth and economic development when referring to the same concept. However, from an economic perspective, growth and development are two diverse concepts and cannot be used interchangeably. Economic growth is one aspect of the process of economic development (Sen, 1983). It is generally regarded as a short term, quantitative notion which is in contrast to the long run, more qualitative percept forming economic growth (Schaeffer et al., 2000).

As Kindleberger (1958) introduces it, economic growth denotes, in a technical and institutional perspective, an increase in the amount of goods and services produced by an economy over a specific period of time. Growth is usually calculated by estimating the accumulation of variations of the national income (GDP), per capita income, consumptions, investments and personal savings (reference?). Han et al (2003) further expands the idea of growth by including in it the notions of productivity and efficiency to account for enhanced production techniques and improved organizational aptitude.

On the other side, Economic Development is a much wider thought than economic growth. It is defined as the continual, concerted actions of communities and policymakers that improve the standard of living and economic health of a specific locality (Tadaro & Smith, 2011). It is a process by which a community creates, retains, and reinvests wealth while improving its quality of life (Dodson, 2009) and includes all the social, cultural, political, and moral factors that are contributors to the material success (Friedman, 2006). As Kindleberger (1958) explains it, the core of economic development lies along the line of the values of Freedom, Sustenance and Self-esteem.

Accelerated Economic development is to be reached by cultivating efforts to stimulate enhanced education and healthcare, increase individual freedom and attain higher purchasing power and a diversified cultural life (World Bank, 1991). Gender equality and environmental preservation are concepts that were later developed, surging in the early 1990's, but which have since been receiving increased attention. Nurturing economic development also entails changes in the composition of output and in the allocation of inputs by sectors (Rodrik, 2004).

The International Economic Development Council (IEDC) delineated a set of guideline policies to be applied by national governments and legislators for stimulating economic development. These policies can be summarized into three categories:

-Policies aiming at providing services such as healthcare or transportation infrastructure.

-Policies initiated by the government to target broad economic objectives such as reducing inflation and unemployment while increasing consumer confidence.

-Policies explicitly directed at improving the business climate through business finance, tax incentives, technology management and transfer or real estate development.

Since each community has its own unique challenges, there is no one policy or strategy that can be applied everywhere to attain economic success. Ultimately a selection combining variable policies that are fitted to local particularities is the best approach. This method has already been adopted by prominent international organisms in their efforts to develop economic development indicators that are to form the basis for assessing development.

2.2- Sustainable Economic Development: What are we exactly supposed to sustain?

Economic sustainable development is a relatively new term that was popularized by the United Nation's Brundtland Commission in 1987. The concept was derived from the early human realization of the necessity to balance resource consumption and reproduction (Ehnert 2009) with the awareness to incorporate resource scarcity and ecological limits into economic growth models. Primeval attempts to delimit the concept of sustainable economic development can be found as far back to the 19th century in Hotelling's theory for the optimal use of exhaustible resources and the Jevons' Paradox [1] involving resource conservation (reference).

A more contemporary attempt to define sustainable development was made by the International Union for the Conservation of Nature (IUCN) commission summarizing it as "the development that meets the needs of the present without compromising the ability of future generations to meet their own needs." The definition was further refined by Pearce et al ( 1990), Munashinghe (1993) and Dasgupta et al ( 2000 ) who added to it social , economic and environmental perspectives. Respectively, Stavins et al (2003) complement the definition by adding the notions of resource interlinkages, intergenerational equity, and dynamic efficiency. In the context of this study, we will use a further contemporary attempt made by Gilbert et al (2006) to interpret sustainable development as "the maintenance and enhancement of environmental, social and economic resources, in order to meet the needs of current and future generations".

Hence sustainable development is not to be perceived as a prohibition to using natural resources but as a path to adopting conservation measures that does not jeopardize the survival abilities of future generations. A divergence among economists lies in the concept of what is actually desired to be conserved. Two main schools of thought can be discerned. The first one, endorsed by Solow (1991) and Markandya et al (2002) is based on the concept that utility [2] should be sustained; meaning the average per capita utility of a generation should be non-declining in order for the next generation to experience at least the same level of wealth and happiness. The second school is more focused on the sustainability of the physical throughput that is, as Daly (2006) explains it, the entropic physical flow from nature's source through the economy and back to nature's sink has to be preserved. In particular, it means to conserve the wellness of the future generations by protecting the capacity of the ecosystem to offer the same current biophysical resources and services in order to maintain production opportunities for the future (World Bank, 2002). It is the minimum state required for the ecosystem continuation at its current levels through generations. Both approaches do provide advantages and limitations, however for the sake of this study we prefer using a utility-based method for defining sustainability.

2.3-Weak vs. Strong Sustainability: which one to choose?

Another debate dominant among economists is the dilemma between

natural vs. manufactured capital as a source of economic sustainability. The literature usually explains this debate as choosing between "Strong" vs. "Weak" sustainability.

A "weak" sustainability revolves around the notion of intergenerational equity. Economists such as Heal (2009) and Arrow et al (2004) define this equity as the requirement that the wealth of a society defined as human capital, knowledge capital and natural capital do not decline over time. As Ayres et al (2000) describes it, weak sustainability is a problem of managing a nation's capital in order to at least maintain it at a constant level either per capita or in total. Based on Pearce et al (1990) weak sustainability encompass natural capital but also a continuous substitution between Man-made and the same considered natural capital. This formulation can be especially valid for non-renewable resources such as hydrocarbons, minerals and deep aquifers (Solow, 1986).

In contrast, "strong" sustainability is seen as preserving life opportunities by conserving the stock of human capital, technological capability, natural resources and environmental quality (Brekke, 1997). As natural resources are essential inputs for economic production, a minimum quantity of ecological and social capital should be maintained in physical terms. As Barbier (2007) expose it, it is the non-depletion of essential forms of natural capital such as the ozone layer, air and water quality among others.

An instructive example of disastrous weak sustainability application is the small Pacific island nation of Nauru where high grade phosphate was discovery in the early 20th century (Gowfy & MacDaniel, 1999). Nauru's society was transformed from a self-sufficient community living within the constraints of the island resources to massive foreign good importers. After nearly a century of phosphate mining, the resource started to run out and the island was left completely devastated with the only useful part of the land reduced to a narrow coastal strip. The island had previously made active attempts to diversify its economy by investing its phosphate revenue in Australian prime real estate and investing in capital stock markets (BBC, 2004). By doing this, the nation applied the weak sustainability concept based on the idea that the Nauru people will sustain their previous standard of life by living out of the rents and interest of the investment trust once phosphate reserves are depleted. By doing this, Nauru placed its well-being at the mercy of fluctuations of the global economy. Unfortunately, a series of major bad investments coupled with the 1997 Asian financial crisis wiped off much of the Nauruan trust turning the once prosperous Nauru state into a failed one (Connel,2006).

By choosing to apply weak sustainability and investing its trust in capital market, Nauru overexposed its national trust fund to external risks. Instead it should have opted for a diversification strategy based on a strong sustainability approach which would have focused more on safeguarding the indigenous natural and human capital of the island by restoring its ecosystem while improving its agricultural abilities, enhancing its touristic attractiveness and providing better educational opportunities for its population.

2.4-Linking sustainability to economics

The above debate of weak and strong sustainability can be economically interpreted as whether each capital stock has to be maintained independently or whether the sum of economic, social, environmental and institutional stocks has to be non-declining (Spangenberg, 2005). Economics rationalism emerges from the need to assume an association between sustainability and commensurability, the ability to measure variable components with a common standard [3] . Moreover, this rationalism is reinforced by assumptions taken by sustainability researchers such as complete substitution (Daly, 1997) and strong comparability and predictability of ecosystems [4] (Sprangenberg, 2005). One has to keep in mind that economic concepts are applied when studying sustainability mainly to provide commensurability and ease of comparison between processes. The studied impact of the sustainability of an economic process, such as the one previously described, is limited to the direct impacts with very limited insight about second level repercussions. An example of this may be to quantify the losses due to the disappearance of the Aral Sea. An economic study can assess the impact of losing job opportunities, the costs incurred due to population relocation or the potential repercussions on human health. Such a study, though, will face real challenges for measuring the cost and impact of climate change as climate cannot be truly valued since it is not substitutable by human-made capital.

3-How to quantify and measure sustainable development

Policymakers need methods to assess sustainability. A very simplistic and somehow efficient way to do so is using sets of sustainability indicators. Indicators are more than just data; they are helpful tools that ease the process of decision-making by simplifying and aggregating information. They help to provide a better understanding of the problem by communicating relationships, ideas and values that are not evident using basic statistics. Studying the evolution of those sustainability indicators over time is a good reflection of the progress of national entities in their effort toward sustainable development.

Over the years, many leading institutions have worked on developing hundreds of global indicators of economic sustainability. Of these we can name the United Nations' Commission on Sustainable Development (UNCSD), Eurostat and the International Institute for Sustainable Development (IISD). As researchers are failing to agree on a common ground for a standard of sustainability indicators, various set of indicators have been independently developed over the years resulting in hundreds of these indicators tackling various aspects of the economy.

In the following section, we will list and describe the mainstream indicators that have been used by the above leading entities in their global assessments of economic sustainability. These indicators share common criteria such as their easiness to be calculated, their relevance to prevalent economic matters and the reliability of the statistics they are based on.

Table 1 below represents a collection of thirteen main indicators used by the previous institutions divided by theme, indicator type, description and the organization that first used the considered indicator while assessing sustainability.

Table 1: Main indicators used by leading institutions to assess sustainable economic development.



Brief Description

Concept Main user for SED


Gross Domestic Product, per Capita or PPP

Market value of all officially recognized goods & services produced in a year by a country


Unemployment rate

The total labor force that is currently not working but is actively seeking employment and is currently available to work



Natural resource productivity

Ratio between Gross Domestic Product and the Domestic Material Consumption.


Energy Consumption

Three indicators: the intensity of energy use by economic activity, the annual energy consumption of a country per capita and the share of renewable energy sources in the specified country's energy mix.


Water and Land use

For land : land degradation indicator which assesses the share of land which is no longer a proper economic or ecological function due to human activity

For water: the proportion of renewable vs. non-renewable water used as a total of water resources used


Human Capital

Adult literacy rate

percentage of the population age 15 and above who can, read and write a short, simple statement on their everyday life


Healthcare delivery

percent of population with access to primary health-care services


Research & Development

the percentage of GDP spent on research and development on the national territory during a specific fiscal year


Life expectancy

average number of years that a person is expected to live at birth as determined by historical statistics


Governance & Institutional

Corruption perception index

Level of corruption in a country as perceived by its citizens and foreign experts.

Transparency International

Crime and Safety

The number of recorded intentional homicide, robbery and vehicle per hundred thousand persons.


Sustainable public finance

the ability of a government to maintain its current spending, tax and other policies in the long run without threatening government default


3.1- The Gross Domestic Product

The leading economic indicator commonly used to measure economic development is the Gross Domestic Product (GDP) per capita. The GDP, also known as nominal GDP, is the market value of all officially recognized final goods and services produced within a country in one year (Kuznets, 1934). GDP per capita is the total GDP divided by the resident population over a specific period. The per capita GDP is a very commonly cited statistic when assessing the economic activity of national economies, and is often considered as an indicator of the country's standard of living. It has proved itself to be quite useful for cross-border comparison between different national and international entities particularly because it can be frequently and consistently measured (Stieglitz, 2009). A growth in GDP per capita is sometimes correlated with an enhancement in the quality of living. It is also the reflection of improved economic efficiency and productivity (Han et al, 2003). The Cato institute found that the increase in the "Happiness" of a population was directly proportional to the increase of the per capita GDP up to a limit of 15,000 USD per person. [5] 

One reliable way to calculate the per capita GDP is the expenditure approach which is done by summing all of the expenditure incurred by individuals during one year then dividing it by the total resident population (UNSNA, 1993). It divides the GDP into multiple components in the form of:

eq. 1

Where Consumption accounts for the private household final consumption (including durable, temporary goods and services); Investment consists of business investment in equipment excluding exchange of existing assets; Government Spending includes the governmental expenditure on final goods and services ; and Net Export represents the difference between gross exports and gross imports.

An additional commonly used variant of the GDP is the Purchase Power Parity GDP per capita or PPP GDP (per capita). It is calculated by analyzing the purchase power parity of a currency relative to other standard reserve currencies such as Euro or US dollar. This method helps alleviate income disparity resulting from the feebleness of emerging countries' currencies in international markets.

However, as attractive as it may looks, the GDP concept offers serious deficiencies as an evaluation tool of economic development, and can scarcely reflect the well-being of the nation. The most prominent argument against its adoption is that it weakly reflects how the wealth is distributed among various demographic groups. This is specifically the case of resource-based economies like Saudi Arabia where equal wealth distribution offer some challenges. Such can be reflected by comparing the Kingdom's nominal GDP and Per capita GDP. In 2011, Saudi Arabia GDP ranked in the highest 20th with a value of 576.8 Billion USD well ahead developed countries such as Luxembourg and Sweden (World Bank, 2011). When considering the Per capita GDP, the Kingdom ranked 41th, considerably lower, with a value of 20,540 USD per person (World Bank, 2011). The country's GINI index, a measure of the income inequality distribution, was around 0.73 in the early 2000s (BTI, 2012) one of the highest in the world [6] . Another example can be taken from the United States, where from 1980 to 1990, 5 % of households increased their real income by more than 20 % with the increase being reflected in the GDP as collective (Cobb & Cobb, 1994).

Increase of GDP doesn't necessarily mean sustainable growth. In 1981 due to oil price peaking, the Saudi GDP per capita reached a maximum of 18000 USD (44,500 $ in 2011USD) quickly draggling down to 6407 USD in 1988 (14160 $ in 2011 USD) due to a reverse drawback in oil price (World Bank, 2012). Such fluctuations are common and reveal that the GDP is just a temporarily measurement of economic activity not a reflection or projection of a consistent standard of living.

Opponents also cite other arguments disfavoring the use of GDP as reliable indicator of sustainable economic development. The GDP does not take into account many core economic aspects such as currency fluctuations, informal economy [7] , non-market transactions [8] and personal remittances moving into and out of the country (Cobb & Cobb, 1994). Another concern is that the GDP fails to take account important externalities such as resource depletion (degradation of farmland, over-extraction of oil and minerals, etc.), environmental damage (water pollution, deforestation, and desertification) and underground black market economy (Redefining Progress, 1995). Impacts of resource depletion and environmental damages may be of special interest for Saudi Arabia. More than 85 % of its current governmental revenue is generated from non-renewable resources with marginal income being produced from diversifications outside the energy and petrochemical sectors (SAMA, 2011). As water and arable land are scarce, the Kingdom's sustainable economic growth is highly dependable on ecological and resource preservation for the future.

Furthermore, non-accounting for the black market economy can lead for a sizeable understatement of the GDP, especially for emerging economies. Nigeria is an interesting case where studies estimate that up to 40% of the GDP is unaccounted for due to black market activities (Havocscope, 2012). These activities cover a wide range of activities from Oil and Gas smuggling to counterfeited goods and music piracy.

Moreover, as the GDP is simply an addition of everything produced within a country, it is not only boosted by the virtuosities of a society but also by its flaws (Nordhaus and Tobin, 1972). In other words, the GDP is also boosted by the decadences of a society such as crime, war or family breakdown as all of these impose large economic costs on individuals and societies in the form of legal and medical expenses, property damages and others. Inasmuch, the GDP treats all the expenses incurred by such misfortunes as addition to the general well-being rather than a reduction.

One way to reflect the limitation of the GDP is to compare it to the Genuine Progress Indicator (GPI). The GPI is a new metric system developed two decades ago by the public policy think tank Redefining Progress as a proposed answer to all the above cited GDP shortcomings. The GPI takes into account aspects of economic live that the GDP usually ignores such as uneconomic growth, cost of resource depletion, cost of natural deterioration, income distribution and others (Talberth et al, 2006). Unlike the GDP, the GPI is less employed worldwide and is not as consistently measured throughout the countries that use it (Lawn, 2003). Finland, Canada and the USA are the most advanced countries in implementing GPI models inside their local economies; however each one of them computes it using a different approach. For the sake of this report, we will adopt the American definition of GPI which is reported by Redefining Progress as:


Where S is the value of welfare producing non-market services, PC the income weighted private consumption, the change in capital stock and balance of international trade, ND the private defensive cost of natural deterioration and D the cost of deterioration of nature and natural resources all in USD.

For the case of the United States [9] , a comparative difference between GDP and GPI ranging from 1950 to 2005 is illustrated for the case of the United States in figure 2 below.

in 2000$

Figure 1: Evolution of the GDP vs. GPI per capita for the United States between 1950-2005 (2000$)

Source: State of Maryland, Economic Department, Annual GPI Report (2006).

As it is noticed from the graph, the evolution paths of both the GDP and GPI are quite diverging. While the GDP nearly threefold increased from 12,000 2000$ in 1950 to 36500 2000$ in 2005, the GPI growth was less steep having only increased 50 % between 1950 (9000$ in 2000$) and 2005 (14000$ in 2000$). The evident difference between the two curves helps reflecting the shortcomings of the GDP as a measure for a nation's standard of living for the reasons previously explained.

3.2-Unemployment rate

Another used sustainability indicator is the unemployment rate. As defined by the International Labor Organization, the unemployment rate is the total labor force that is currently not working but is actively seeking employment and is currently available to work (eq.3). To be defined as a job-seeker, the unemployed worker must have been making the effort of contacting employers, having job interviews and using any other mean of job placement within the prior four weeks (ILO, Eurostat, 2011).


One has to be careful when using unemployment rate as an indicator of economic sustainability. A low unemployment rate does not always mean that the economy is in a sustainable path. Individuals can be working but still be under-employed. A person is classified as under-employed when, despite being a highly skilled worker, is working in low paying jobs leading to them not using all the mental and technical capacities (Fields, 1975). A high under employment rate often correlates with the underutilization of the working force inducing a lesser benefit to the general economy and thus jeopardizing its long term subsistence. (Underemployment rates are really hard to compute for Saudi Arabia, no raw statistics are available)

Additional concern when using this indicator is that it does not distinguish between unemployment and overstaffing. Known as a hidden form of unemployment, overstaffing refers to employing workers without giving them enough work occupation leading them to become economically inefficient. This type of work is common among governmental agencies, state run companies and in highly seasonal jobs such as tourism and agriculture (source ?). Hidden unemployment may be a concern for Saudi Arabia as the governmental and sub-governmental sectors employ around 38 % of the Saudi labor force (SAMA, 2010) while the tourism sector (notably religious tourism) provides a further 8% of Saudis job opportunities (CDSI, 2010) which means that around 45 % of the Saudi labor force is potentially at risk of hidden unemployment (Figure 2).

Figure 2 : Distribution of the Saudi Labor Force by Sectorial Activity

Source: SAMA 47th Annual Report, CDSI Annual Report (2011)& Author Analysis

Furthermore, using a general unemployment rate as an indicator for Saudi Arabia's economic development may be deceitful as there is a large disparity between females and males unemployment rates. While the official general unemployment rate is around 10% (SAMA, 2011), the female unemployment rate is around 6 times higher than the male's reaching records high of 24.9% in 2010 ( CDSI, 2011). Yet, as much as this rate may look high, it may still be an under-estimate as it is quite hard to report the status of a female as a job seeker especially when she may be still performing her role as a housewife. Moreover, the female participation rate in the labor force is an important indicator that should be considered. A low female participation rate such as is the case for Saudi Arabia (17% in 2010, World Bank) despite high academic level attainment implies that a large segment of the society capabilities and professional aspirations is not made in use which undeniably limits the society's prospects for sustainable economic development ( Figure 3).

Figure 3: Unemployment rate and Female labor Participation Rate in Saudi Arabia from 2001 to 2010.

Source: World Bank Data Statistics (2012), SAMA 47th Annual Report (2011), CDSI Annual Reports (2011)

Moreover, the tightening of the Saudi labor under the Nitaqat regulations (2011) led to the creation of a system imposing on companies to have a certain percentage of Saudi citizens as part of their workforce as per their field of work. Faced with such obligations to hire Saudis, some companies resorted to fake employment such as paying nationals to have their names used in government official statistics without having them actually working in the company [10] . If the abuses become applied on a large scale, they can have serious repercussions on the consistency of the unemployment statistics gathered by local authorities and further degrade the reliability of the unemployment rate as an indicator for sustainable economic development.

3.3- Life Expectancy at Birth

Variation of Life expectancy is a commonly used indicator to assess the sustainability of an economy. As defined by the World Health Organization (2010), life expectancy is the average number of years that a person is expected to live at birth as determined by historical statistics. It is usually predetermined by the person's background such as condition, race, age, sex or other demographic factors. The evolution of population life expectancy over time is a good indicator of the progression of the nutritional and the health-care development levels for the considered countries (UNCSD, 2007). However life expectancy at birth is highly sensible to infant mortality rates which can lead to wrong interpretation in emerging countries where infant mortality is relatively elevated. This can be solved by studying the population life expectancy at age 5. Such a measure will exclude infant mortality rate leading to a better understanding of the evolution of adult's quality of life.

The graph below in Figure 4 shows the evolution of life expectancy at birth and at age 5 for Saudi Arabia. The life expectancy at age 5 for Saudi Arabia has been generated by deducing the mortality rates of children of below age 5 from the general life expectancy function and life table used by the World Bank. The life expectancy of Saudi citizens has come a long way increasing from 47 in the early 1960s to 74 in 2010 (World Bank, 2011). Likewise, the live expectancy at age 5 [11] has increased from 52 in 1960 to 76 in 2010 which means that the increase in life span is not only due to a decrease in infantile mortality rate but also to a general increase in the quality of life. Nonetheless, the infantile mortality rate did drastically improve with the difference between life expectancy at birth and at age 5 being reducing threefold from 6 years to around 2 years (Figure 4).

Figure 4: Life Expectancy with and without mortality rates

Source: World Bank 2012 & Author analysis

3.4- Adult literacy rate

The UNESCO defines the adult literacy rate as the percentage of the population age 15 and above who can, with understanding, read and write a short, simple statement on their everyday life (UNESCO, 2011). In addition to being able to write, a literate adult must also be numerate, i.e. having the ability to process simple arithmetic calculations. The literacy rate indicator is calculated by dividing the number of literates aged 15 years and over by the corresponding age group population then multiplying the result by 100. It is very important to look at the women literacy rate when studying the development of an emerging country as women are sometime at disadvantage when seeking academic opportunities.

Adult literacy rate is a good indicator for reflecting the development stage of a society. However it would be more interesting to look deeper into the educational attainment level especially on more specialized indicators such as the number of adults with various university degrees. Both indicators help assessing the quality of the human capital of a society and the skills of its labor market. Also, decomposing those two indicators by sex may give further insight to the status of SED.

In the case of Saudi Arabia, the adult literacy rate increased from 70% in 1992 to 86 % in 2009 (World Bank, 2012). Moreover, the male and female enrolment in general education increased tenfold from 536,400 students in 1970 to 5,147,000 in 2010 (MEP, 2010) reflecting an amelioration of youth education for both sexes.

Figure 5: Male and Female Enrolment in General Education in Saudi Arabia from 1970 to 2010.

Source: MEP, Achievements of the development plans, 2011.This trend is also confirmed when looking at the evolution of educational attainment of the Saudi population with then number of bachelors and masters students graduates nearly tripling from 1996 to 2010 ( CDSI, 2011) and the number of doctoral students doubling for the same period. All these indicators endorse that Saudi Arabia is implementing a sustainable economic path from an academic perspective.

Figure 6: Saudi Graduates from Local Universities by Educational Level 1996 to 2010

Source: CDSI Annual Report (2011) & Author Analysis.

3.5-Sustainable Public Finance

As explained by Belassone et al (2000) sustainable public finance (or fiscal sustainability) denotes the ability of a government to maintain its current spending, tax and other policies in the long run without threatening government default on some of its liabilities and promised expenditure. One way to calculate future fiscal sustainability is to use the Permanent Income Hypotheses (PIH) developed by M. Friedman in 1957 [12] . The PIH has been commonly used in the context of hydrocarbon resource rich economies. It defines Sustainable Government spending in function of the expected annuity value of financial and hydrocarbon revenues in the form of:


With representing the national sovereign fund financial assets accrued at the end of the previous year, the expected rate of return on the sovereign fund, n the number of years remaining until depletion of hydrocarbon reserves, FR the total fiscal revenue for period n and d the discount factor.

Aissaoui (2012) applied this method to simulate fiscal break-even prices for OPEC countries. In the case of Saudi Arabia, applying a 5% discount factor and assuming that 70% of the crude oil production is exported at international prices, he found that the median estimates of the break-even hydrocarbon prices for 2012 range around 94$ per barrel (Figure 7 below). Assuming a permanent income of crude oil rents at prices ranging in the 100-110 $ as reflected during the past two years, the Saudi budget seems well-balanced for years to come unless major distortions or expenditure occur.

It is important to note that the above approach has some limitations for economies relying mainly on resource export. It ignores the effect of fluctuations in currency exchange rate. In the case of Saudi Arabia, where the national currency is pegged to the US dollar, the government income generated from hydrocarbon sales is accumulated in US dollars while the national budget is run in the Saudi riyal. Because of this, the Saudi Riyal is inherently inflationary, leading to higher price especially with 80% of imported products flow from outside the US (CDSI, 2011).

Figure 7: OPEC Fiscal Cost Curve for 2012

Source: Ali Aissaoui, Economic Commentary, August-September 2012, Apicorp Research

Another problem that can be faced with this indicator is the reliability of the provided statistics. It is typical to have multiple amendments involving the budget adding supplementary or complementary revision over the year. Having such common extra-budgetary transactions tend to affect the quality of the indicator as it won't be able to truly reflect the status of the public finances (Aissaoui, 2012)

As it was the case with the GDP indicator, the public finance indicator in Saudi Arabia will be highly susceptible to fluctuation in energy prices. Since crude oil is the Kingdom's paramount export product generating more than 85% of governmental revenues (SAMA, 2011), the public finance indicators is highly sensitive to any change in the price of crude oil.

3.6- Corruption Perception Index

The goal of corruption indicator is to measure the prevalence of corruption among government officials resulting from the misuse of public power for private benefit (Gatlung, 2006). The most prevalent corruption indicator is Transparency International's Corruption Perceptions Index (CPI) which is produced by surveying experts affiliated with leading institutions such as the World Bank, the World Economic Forum and others. All 180 surveyed countries are ranked on a scale of 10, 1 being highly corrupt and 10 being very clean. An increase in this indicator is a sign of progress on the track to good governance, an essential component for sustainable development.

Based on the CPI indicator, Saudi Arabia has made some progress with its CPI increasing from 3.3 in 2006 to 4.7 in 2011 and its worldwide rank jumping from 80th in 2007 to 57th in 2011 (Figure 8). The CPI may give a general indication about the corruption status in a country but it certainly has its own flows. The CPI is based on people's perception which is highly affected by public opinion (Byrne et al, 2010). The problem with public opinion is that it is highly volatile and susceptible to people's prejudgments. Rumors about corruption cases can be easily circulated in the media for political reasons, without having consistent grounds, but will nevertheless still be impacting public opinion. Consequently, perception based indexes lead to large margin of errors as they do not account for the indirect effects of subjective factors (Bertrand and Mullainathan 2001).

Furthermore, petty corruption and social favoritism are usually not accounted for in those indicators. Citizens in many countries tend to pay modest bureaucratic advances to civil servants assuming this is normal behavior for paperwork processing (Byrne, 2007). These small recurrent payments are scarcely accounted for in the CPI and other corruptions indicators because they are very hard to measure. Likewise, social favoritism is also hard to divulge and does considerably affects the quality of CPI. It's find its roots when a decision maker favors a person or company over others based on social connections such as family links, kinship or personal preference and not based on professional qualifications (Nadler and Schumann, 2006).Unlike bribing and other form of corruption, it does not include any financial compensation or exchange of goods. Social favoritism is pretty much inherent to the middle-eastern society especially in work environment, study by Loewe et al (2008) about Jordan's business climate showed that more than 60% of business decisions do hide some form of social favoritism.

Figure 8: Corruption Perception Index and Worldwide ranking for Saudi Arabia

Source: Transparency International, CPI (2011) & Author Analysis

3.7-Crime and safety indicator

Crime and safety indicators are worthy meters of sustainable economic development and are a good reflection of increased standard of living and better economic trends. Previous findings did correlate the criminal motivation theory which suggests that economic stress may be an incentive for individuals to engage in illicit behaviors (UNODC, 2009).

As defined by the United Nations Office on Drugs and Crime (UNODC), the crime indicator accounts for the number of recorded intentional homicide, robbery and vehicle per hundred thousand persons. It aims to measure the development of crime over time in order to reflect a country's adherence to the rule of law. A high crime rate has considerable negative repercussion on the sustainable development of an economy, as it reduce the sense of safety while contracting the quality of life. A high crime indicator is usually synonym with bad governance and an inhibitor to the flow of foreign investment (UNCSD, 2007).

Saudi Arabia has had normally a low crime rate accompanied by a high perception of personal safety in the country. It was ranked 32nd among the 50 most industrialized countries by number of total crimes committed (84599 total crimes in 2002) [13] .However, when considering Saudi Arabia, crime statistics have to be cautiously taken as an indicator of sustainable economics. Many researchers consider these as better indicators of law enforcement and disposition to report crime than the actual crime prevalence. Sheptycki and Wardak (2005) emphasized on the tribal structure of the Saudi society to explain how criminal complaints are frequently resolved outside formal judicial institutions subsequently remaining undocumented by law enforcement agents. Furthermore, crime indicators do not generally differentiate between crimes committed by locals and those committed by expatriates. In the case of Saudi Arabia a considerable amount of crime is committed by low income expatriates (45% in 2008 [14] ). Taking into account these statistics for long-term studies such as is the case for economic sustainability can be misleading, as most of the culpable expatriates are temporary short-duration workers who are usually deported after serving their sentences.

A fact to be considered is that the Saudi Legal System is based on Islamic Shariah law which has different views on many immoral or illegal activities compared to the common law legal system under which the crime indicators were first introduced. Large differences between the two systems may lead to difference when generating crime statistics leading to variations in indicators even when the same type and quantities of events occur.

3.8-Health-care delivery indicator

The health-care delivery indicator relies on assessing the percent of population with access to primary health-care services (UNCSD, 2007). Primary healthcare is defined as the needed essential health care offered at an accessible cost. The provided health-care system has to be reliable and applying methods that are practical, socially acceptable and scientifically sound.

The health-care delivery indicator incorporate a set of sub-indicators such as the number of hospital beds and physician per 10 000 people, percentage of children immunized against childhood diseases and the morbidity of major diseases such as AIDS, malaria and tuberculosis (UNCSD,2007).

The Saudi government provides free healthcare services to all its citizens allocating in 2010 more than 4.3% of the GDP for such activities ( World Bank, 2011) or about 967 $ per capita (WHO, 2011). The country had 22 hospital beds per 10,000 people in 2009 (NCB, 2010), 9.42 physician per 10 000 people (WHO, 2007) while 98% of its children are immunized against childhood diseases (World Bank, 2011). The tuberculosis rate was very low in 2010 at around 18 cases per 100,000 peoples while there were 32 cases of malaria per 100,000 people for the same year (WHO, 2011). There have been 15,213 cases of AIDS in Saudi Arabia from 1984 to 2009 with only 23 % being Saudis and the rest expatriates. [15] 

Figure 9 below shows the evolution of the number of physicians, hospital beds and governmental expenditure per capita in Saudi Arabia from 1970 to 2009. We can notice from the graph that the number of physicians and hospital beds increased steeply from 1970 to its peak in the early 1990s before starting having a slow downward trend. Faced with this situation, the Saudi government allocated in its 9th development plan 273.9 billion riyals to develop the healthcare infrastructure from 2009 toward 2014 ( MEP, 2011). A large part of this sum, 67.5 billion SAR will be apportioned toward building and renovating hospital adding an extra 41,000 bed by 2014 with the aim of reaching the threshold of 3.5 hospital beds per 10,000 people. [16] 

Figure 9: Evolution of the Number of Physicians, Hospital Beds and Per Capita Expenditure fin KSA from 1970 to 2009. Source: World Bank (2012), CDSI Annual Report (2011) and Author Analysis.

Calculating the health care delivery indicator is essential in assessing the society's wellbeing, one of the pillars of economic sustainability. However, this indicator can be sometimes misleading when matched with the reality. It may be interesting to quantify the number of physicians and hospital bed available to the population, yet more focus has to be concentrated on the quality of the service provided. One sub-component that may be inserted is the treatment success rate index or maybe the number of patients dying while or after receiving a certain treatment. In addition, more effort has to be made to research any inequalities between genders physical accessibility to healthcare (Klasen, 2011)

Another issue involving the indicator is the unavailability and inaccuracy of Saudi statistics pertaining to major diseases. One reason may be the societal stigma still surrounding the sexually transmitted diseases, where the patient is ashamed revealing its condition in fear of peer discrimination. In the case of HIV, expatriates who account for 75% of the reported cases are not entitled to free health-care and are very reluctant to divulge their infection as this will almost always results in their expulsion outside the country (Walker, 2009).

3.9-Natural Resource productivity:

The Natural Resource Productivity indicator (NRP) was first developed by Eurostat (EU SDS, 2000) [17] with the objective to frame an evaluation process for sustainable consumption and production. It is the ratio between Gross Domestic Product and the Domestic Material Consumption. As defined by Bleischwitz and Hennicke (2004), the Domestic Material Consumption (DMC) is the annual quantity of raw materials extracted from the economy's domestic territory (DRM) adding to it all physical imports (MI) then subtracting from it all the physical exports (ME).


The importance of the NRP as an indicator lies in its ability to distinguish indigenous economic growth from the economic impact of natural resource extraction. Accounted raw materials consist of cereal, feedstock, vegetable, minerals (cement included) and hydrocarbons resources. The NRP is a measure of the material intensity of the studied economy (Dahlström and Ekins 2005). The highest the NPR, the best it is as lower energy intensity means more efficient use of natural resources in primary production, enhanced waste disposal and reduced environmental degradation (Weizsäcker et al, 1992).

Using Equation 5 above, we have calculated the Natural Resource Productivity for Saudi Arabia showed in Figure 10 below. We can notice that from 2003 to 2008, the NPR has been steadily increasing in parallel with the GDP. Since the gap between the two curves is fairly constant, it can be concluded that the surge in the value of the NPR is due to the GDP growth with the Domestic Material Consumption (DMC) remaining stable. In 2009, due to the 2007-2008 global financial crises, Saudi NPR stopped it growth due to the reduced growth of the GDP.

Figure 10: Evolution of the Resource Productivity in Saudi Arabia from 2003 to 2009

Source: Author Analysis based on Statistics from CDSI, Annual Report (2011) ; Data from the Saudi ministry of Oil and the World Bank Databank( 2012).

As seen in figure 11 below, Saudi Arabia natural resource productivity is very low (0.31 $ per kg) when compared to other countries. This may due to the fact that energy and raw materials are subsidized by the government for the local market to the point where resource and energy efficiency measures become uneconomical [18] . Furthermore, the Saudi NPR is about one third of the average world NPR (1.15 $ per Kg) reflecting the country's little efforts in resource management efficiency.

Figure 11 : Comparison of Natural Resource Productivity between selected countries in 2004

Source: Author Analysis based on data from Wuppertale Institute, The relation between resource productivity and competitiveness (2007) and previous figure.

The resource productivity approach has indeed some advantages but also sizeable weaknesses. Being a ratio of GDP over DMC, the NPR is affected by both their shortcomings. As exposed in section 3.1, the GDP encompasses multiple glitches that makes it an unreliable indicator for sustainable economic development such as its treating of natural disasters, social breakdown (crime, divorce…) and polluting activities as economic gain (Cobb, 2006). An increase in the GDP for any of the above reason will lead to an increase in the NPR which can be wrongly interpreted as an increase in the resource efficiency of the studied economy. Furthermore, a large component of the GDP is generated from the services sector (38 % in the case of KSA [19] ), a segment of the economy which has traditionally been the least dependent on natural resources. Any growth in this sector will lead to a higher GDP and consequently a higher NPR wrongly relaying that the economy has been evolving toward a more resource efficient path.

Likewise, the DMC counts the natural resources as a bulk, taking account of their weight instead of their utility to the society. All type of resources are treated the same irrespective of their intrinsic value; a kg of gold is treated the same as a kg of tomatoes which can be excessively misleading as it is way harder to produce gold than tomatoes. If, for a specific year, a country's agriculture outcome was remarkably high, it will inflate its DMC at the expense of other resources, especially minerals, whose production did not proportionally increase. Another problem with the DMC is the difficulty of correctly assessing the physical imports of raw materials as many products labeled as semi-finished manufactured products for a certain industry are still sometimes considered as raw materials for another one.

3.10-Research and Development

The research and development indicator has been proponed by the UNCSD who included it consecutively in it 2001 and 2007 guidelines. It is calculated as the percentage of GDP spent on research and development on the national territory during a specific fiscal year (UNCSD, 2007)

The R&D indicator is helpful to reflect a country's commitment to innovation. Research is primordial in developing new improved products and services forming the basis for continuous economic growth (Pessoa, 2007). In the case of sustainable development, R&D forms a scientific knowledge base for informed decision making (UNCSD, 2007).

Figure 12 below show a comparison of research expenditure between four countries (Sweden, USA, Argentina and Saudi Arabia) as a percentage of their GDP in 2008. All countries except USA had very close GDPs in the range of 500 billion USD (IMF, 2009). However when looking at their R&D expenditures percentages, we notice the large disparity with Sweden's R&D investments (3.62%) accounting for 45 times the Saudi R&D investments (0.08%) in 2008. Moreover the Saudi expenditure percentage is about 25 times lower than the world average. Such a contrast reinforces the need for diversification of the Saudi economy by transforming itself from a rentier economy to a knowledge-oriented one. This transformation is critical for keeping a sustainable economic growth path.

However, the stated indicator has to be treated with care. The expenditure percentage does not make any difference between researches for military or humanitarian/social purposes. Many top research spending countries are actually spending on military research (China, Russia, and USA) rather than research directed toward social development which may jeopardize the role of research as a source for well-being improvement. For such, a high research indicator based on high military expenditure will be giving a false credence of sustainable development while it is actually doing the opposite.

Another problem with this indicator is that it disfavors economies with large GDPs. For example, the USA and China are the two largest countries spending the most on research and development respectively spending 405 and 250 Billion USD in 2011 (Batelle, 2012) . However as high as their R&D budget may be, it is never more than 2.5% of their GDP. In contrast, Sweden and Israel were each investing 10 billion USD each (Batelle, 2012) never having their research expenditure percentage lower than 3.5 % of GDP.

Figure 12: Research expenditure in % of GDP for selected countries in 2008.

Source : World bank 201 DatasetA solution for the problem above stated may be adapting the indicator to be based on the country's R&D expenditure per capita adjusted to the purchase power parity. This will ease any difficulty faced when comparing countries with various GDPs and standards of living. The indicator can further be divided into two components one including funds committed to military research and the second one funds associated with development research.

3.11-Energy consumption

A comprehensive guideline of energy indicators for sustainable development was introduced in 2005 by a consortium of international agencies led by the International Atomic Energy Agency (IAEA) [20] . The final set of energy indicators exceed thirty of which we will on discuss the three main : The intensity of energy use by economic activity, the annual energy consumption of a country per capita and the share of renewable energy sources in the specified country's energy mix.

Analyzing the energy intensity of a country reflects the status of the energy efficiency of its economy and the effect of its economic activities on the environment (IAEA, 2005). The energy intensity (BTU/$) is defined as the ratio of total energy consumption for a specific country (MJ) over the gross domestic product ($).


High energy intensity reflects a high cost for converting energy into GDP (UNDESA, 2006). High energy intensity can also divulge a certain improvement in the standard of living of a population as it seeks more and better consumer goods which lead to higher energy consumption (air conditioner, heaters, cars ownership, etc.).

However, this thinking has its limitations. As Saudi Arabia heavily subsidies energy sources (gasoline, electricity and gas), its population has no incentive to apply energy efficiency solutions which may lead to increase in energy intensity without actually reflecting an amelioration in standard of livings. For this, the energy intensity of Saudi Arabia doubled from 4980 BTU/05$ in 1980 to around 12000 BTU/05$ in 2000.In contrast, the GDP in 2000 is quite comparable to the one in 1980 averaging around 180 Billions 05$ (Refer to figure xx below). Moreover, the contrast is even more apparent if we consider the GDP per capita which actually decreased from 17600 05$ in 1980 to 9200 05$ in 2000 (IEA, 2012).Saudi Arabia energy intensity indicator reflect major deficiencies that need to tackled to preserve sustainability.

Furthermore, the energy intensity indicator should be further divided by the type of economic activities in order to identify which sectors of the economy are not energetically sustainable. The petrochemical sector in Saudi Arabia is an evident example. In 2010, it exhausted 19% of the country's energy while only producing around 3 % of the national GDP. [21] 

Figure 13: Evolution of Saudi Arabia's Energy Intensity from 1980 to 2009.

Source: International Energy Agency 2012, Author Analysis.

The two other energy indicators do also provide some insight. Studying the energy consumption per capita enables us to mirror the energy-use patterns of an economy and the level of its dependence on energy for its economic growth (IAEA, 2005). In the same way, the evolution of energy consumption can help illustrating the environmental effects of economic growth such as increase in pollution levels and resource depletion (UNCSD, 2007). Referring to figure XX below Saudi Arabia annual energy consumption increased about 5 times between 1980 (31100 ktoe) and 2009 (157855 ktoe) while it GDP per capita remained constant at around 15,000 $ for the considered period (World Bank, 2012). This underlines the urgent need for action to reduce Saudi energy consumption in order to safeguard the economy from the repercussions of any potential future energy crisis.

Additionally, the renewable energy production is also an important energy indicator. A high percentage of shares of renewable energy in energy production are highly correlated with sustainable economic development (IAEA, 2005). Renewable energy should be an essential part of a country's energy mix as it increases its energy security, reduce its dependence on a single source of energy supply and reduce environmental degradation. Saudi Arabia current energy production of renewables is in practice non-existent (about 0.01% in 2010, World Bank). However the King Abdullah City for Atomic and Renewable Energy (K.A.CARE) has been established in 2010 with the aim to reverse this situation. By 2032, K.A.CARE plan to double the Kingdom's power plant generation capacity to about 120 GW with about 35% generated by solar energy (CSP and PV) and another 15% by nuclear energy. [22] 

Figure 14: Evolution of Primary Energy Consumption in Saudi Arabia and the World from 1980 to 2009. Source: World Bank, 2012

3.12-Land and water use

Managing the land use for ecological agricultural development and preserving the water security is primordial to sustainable economy. The UNCSD uses the land degradation indicator to assess the sustainability of land usage. The indicator assesses the share of land which is no longer a proper economic or ecological function due to human activity (UNCSD, 2007). Such activities include the excessive use of synthetic fertilizers, pesticides, tillage and irresponsible irrigation and are often caused by industrial agricultural production. In addition, the chaotic expansion of agricultural land is also sources of land degradation as they impact environmental biodiversity by contributing to deforestation and loss of natural habitat. Biodiversity loss can lead to considerable environmental degradation in the biosphere increasing an economy's vulnerability to food shortage in the long-term. [23] Environmental degradation in the Amazonian rain-forests and African tropical regions is an example how land mismanagement can be a source of constraining or even eliminating regional development (Faminow, 1998).

On the other side, water supply security is imperative for continuous economic development. The most commonly used indicator is the proportion of renewable vs. non-renewable water used as a total of water resources used (UNCSD, 2007). This indicator help illustrating the degree to which renewable water resources are exploited through the hydrological cycle to meet the country's water needs. A high utilization rate of renewable water resources is a good gauge of the efforts made in fighting water scarcity and is an important measure of a country's exposure to water deficiency. Non-renewable water sources include groundwater from the deep fossil aquifers and water desalination while renewable sources include surface alluvial water and renewable groundwater from shallow aquifers.

Less than 10% of Saudi Arabia's water consumption is from renewable sources. The remaining is produced from non-renewable sources such as desalination (50%) and deep ground-water aquifers (MOWE, 2010). Water security is a critical issue for the kingdom, especially as water retail prices are highly subsidized by the government which leads to disproportional water consumption and high leakage in water conduits reaching around 30% (Avancena, 2010). Because of this, the Saudi water consumption per capita is 91% more than global average consumption [24] while the annual demand increase is averaging an alarming 1.8 % (MOWE, 2010). In order to reach more sustainable water consumption levels , Saudi Arabia has to implement critical reforms, especially in the agricultural sectors which encompassed more than 86% of water consumption in 2010 ( MEP, 2010).

The same complexity does apply for the sustainability of the agricultural sector from an economic perspective. The Saudi government has subsidized more than 34% of the value of all local agricultural products between the years 1991 to 2008 accounting for more than 146.3 billion riyal ( refer to Figure 15 below). Agricultural developers used this help to import large quantity of fertilizers, equipment, and labor sizably increas