The relationship between manufacturing production and economic growth in the Kingdom of Saudi Arabia

Abstract

PurposeThe purpose of this paper is to examine the long-term relationship between the performance of the manufacturing sector and economic growth in Saudi Arabia. It does so by testing Kaldor–Verdoorn and Thirlwall’s laws.Design/methodology/approachThe authors used data for the period 1980–2014 from databases of the World Bank, the Saudi Arabian Monetary Agency, the Penn World Table (PWT8) and the five-year plan of the Ministry of Planning and National Economy of Saudi Arabia. The authors used the bound test for the cointegration approach, which allowed them to test the two hypotheses in the long run, after examining the stability of the time series and ensuring the rank of its stability.FindingsThe results that emerged from the analysis show that Kaldor’s law is applicable to the data on the KSA, but with decreasing returns to scale, with coefficient equal 0.83. Verdoorn’s law is also applicable at both macro and sectoral levels with elasticity coefficient equal to 0.81 and 0.616, respectively, also with decreasing returns to scale. For Thirlwall’s model, the results show that the relationship was reverse, contrary to what expected, with a significant elasticity coefficient of 0.599.Social implicationsThis study recommends that policy makers in the Kingdom of Saudi Arabia focus on the industrial sector because of its impact on productivity, social returns and other sectors of the economy.Originality/valueOne of the important aspects of this paper is that it tests both Kaldor–Verdoorn’s and Thirlwall’s laws in the case of countries that depend on oil exports for growth and where the contribution of industrial output to GDP, in Saudi Arabia, is relatively low, at about 13 percent, across the period 1970–2013, and about 16.8 percent between 2000 and 2013 (see Figure 1). Since there have been few studies on this subject, the authors used data from Saudi Arabia to provide evidence of the importance of diversifying the economy by increasing the contribution of manufacturing to GDP to ensure increased productivity and to promote economic growth.