Identifying and characterising volatility in economic growth: Evidence from Saudi Arabia

• Published date: 01 May 2022
• Author: Mushtaq Ahmad Malik,Tariq Masood
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2467

ACADEMIC PAPER

Identifying and characterising volatility in economic growth:

Evidence from Saudi Arabia

Mushtaq Ahmad Malik | Tariq Masood

Department of West Asia and North African

Studies, Aligarh Muslim University, Aligarh,

Uttar Pradesh, India

Correspondence

Mushtaq Ahmad Malik, Department of West

Asia and North African Studies, Aligarh Muslim

University, AMU, Aligarh, Uttar Pradesh

202002, India.

Email: malikmushtaq10@gmail.com

The objective of this article is to examine the sustainability of long-run economic

growth in Saudi Arabia over the period 1970–2016. It also discusses the changes in

explanatory variables (such as investment, government consumption expenditure,

household consumption expenditure, final consumption expenditure, exports,

imports, fuel exports, oil prices, oil production, resource rents, the share of agriculture

and mining sectors in total output, terms of trade, exchange rate and foreign direct

investment inflows) associated with substantial jumps in the trend growth. The study

employs a statistical approach of Bai and Perron (Econometrica, 1998, 66,47–78;

Journal of Applied Econometrics, 2003, 18,1–22) and subjective approach of

Hausmann, Pritchett, and Rodrik (Journal of Economic Growth, 2005, 10, 303–329) to

identify the significant up-breaks and down-breaks in the trend growth. Further, the

study subjectively determines the growth regimes of booms and recessions in the

Saudi Arabian economy. The statistical results of the article can be summarised as fol-

lows: we found four significant breaks in the growth trend of Saudi Arabia that

occurred in the years 1978, 1985, 1992 and 2002. The article argues that the long-

run growth trend of Saudi Arabia is characterised by rapid, moderate, stagnation and

collapse growth regimes over the past four decades. In addition, the article found

that strong growth regimes are associated with improvements in investment, aggre-

gate consumption expenditure, exchange rate, foreign investment inflows, fuel

exports and imports. On the other hand, growth collapses are associated with a

decline in these factors, along with an increase in resource rents, oil prices, oil pro-

duction and adverse terms of trade. These latter results indicate the presence of a

resource curse in the economy of Saudi Arabia.

1|INTRODUCTION

Achieving stable growth and sustaining it over the time appears the

fundamental economic policy objectives in both developed and devel-

oping countries. Economic stability requires constant growth sustained

over the period with low fluctuations. Stable and sustained growth

leads to improvements in productivity and efficiency, andlow levels of

unemployment.On the other hand, unstable and volatilegrowth experi-

ence causes problems of recession, inflation, exchange rate crises,

reduced foreigninvestment inflows and reduced purchasing power of a

given country. The recent sustained growth experience of China, India

and East Asian countries demonstrate the role that sustained growth

can play. The success of the developed world indicates that it is the

sustained and stable growth that increased the production possibility

frontiers overtime. As a result, economic growthhas become a central

area of inquiryin theoretical and empirical research in macroeconomics.

A large body of literatureon economic growth tries to explorepotential

determinants of long-run growth ranging from economic, political to

institutionaland cultural factors. Therate of investment in physicalcap-

ital, budget surplus, terms of trade, international openness, years of

schooling,democracy and the role of law are positivelyand significantly

associated with economic growth. On the other hand, real exchange

Received: 28 May 2020 Revised: 4 August 2020 Accepted: 3 September 2020

DOI: 10.1002/pa.2467

J Public Affairs. 2022;22:e2467. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of9

https://doi.org/10.1002/pa.2467