Oil windfalls, the Dutch Disease, and the Saudi Arabian experience: 1970-1987

A central problem facing the oil producing countries in general and Saudi Arabia in particular is the deterioration of the traditional sectors and the expansion of the non-traded goods sector. The central argument of the Dutch Disease theory is that the rise in the oil revenue (or oil prices) will stimulate a rise in the price of the non-traded goods causing relative price of non-traded to traded goods to go up. This study rests on developing a two-sector macro-econometric model to examine both the positive and negative impacts of the oil boom. The primary analysis is place on the spending effect rather than the resource movement effect. The reason behind excluding the resource movement effect is the enclave nature of the oil economy. Annual data for the period 1970-1987 are utilized. It is found that oil revenue and oil price have negative effects on the real exchange rate. The non-traded goods sector in Saudi Arabia is found to have benefited substantially from the oil revenue and the appreciation of the exchange rate