Saudi corruption crackdown

If you are to search the word corruption on any search engine at this moment, you are most likely going to see headlines covering Saudi Arabia’s corruption crackdown. Well, 3 days ago a royal decree was issued and ordered to detain dozens of powerful princes, former ministers, and businessmen that are believed to have been involved with corruption. Saudi officials closed down private plane airport, and the Saudi Monetary Agency has ordered banks to freeze private bank accounts of the detainees. 

Corruption: “A form of dishonest or unethical conduct by a person entrusted with a position of authority, often to acquire a personal benefit. Activities of corruption can include bribery, and embezzlement. “

The move was long over due, too long have Saudi been plagued with corrupt public leaders that aimed to benefit themselves and their relatives at the expense of society. The costs of corruption is high, especially in shaping people’s incentives and expectations.  It reduces the trust people have in the political and economic systems they inhabit. This leads to a loss of faith in the institutions and leaders they follow. Which creates the wrong incentive for people, one that is  not aligned with prosperity and sustained economic growth.

corruption

Figure 1 is from the Journal of Economic Perspectives; the paper is called “Eight Questions about Corruption” by Jakob Svensson. The figure depicts a regression line of corruption on per capita income. There is a strong negative connection between the relationship between the well being of countries and corruption. Even though measuring corruption can be difficult, its impact can spread to other factors other than just income.

Corruption can also cause large wealth inequalities and labor market failures. The case can be particularly strong in Saudi. I just do not have the data to test this.  Essentially, Saudi Arabia’s labor market decisions is predominantly influenced by connections rather than qualifications. If you know the right person in Saudi, you are most likely going to be hired. This reality is seen by many of us, and it causes the wrong incentive. If people are getting hired based on their connections rather than their qualifications, this can be an indication that education, experience, and training does not matter as much as it should at determining wage levels and job-skill matchmaking. Which could send all kinds of wrong labor market signals.

On an international level the move is welcomed and feared. The corruption crackdown is believed to have effected oil markets. Oil prices hit a two-year high on Monday.

brent_crude-2017-11-08
Figure2-Oil prices hit two-year highs on Monday following bullish news coming from OPEC and the Middle East, further stressing the tremendous impact of geopolitical risk on oil markets.

Figure 3 below depicts the Saudi Riyal  exchange against the US Dollar. The announcement of the arrests was on the news on November 4th. We can clearly see signs of fear against the currency that persisted for more than a day.

saudi riyah
Figure 3- Saudi Riyals for every 1 US dollar.

As Saudi approaches its vision in 2030, and Aramco’s IPO in 2018. It is going to need to signal to investors that corruption is not welcomed.  Investors need assurance that their property rights and investments are going to be protected from any entity. No matter how big the family name is or how deep their pockets go, corruption does not have a place in the new Saudi Arabia.

 

 

 

 

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SAUDI GDP: Using R visualization

There is an important distinction to be made when anyone examines Gross Domestic Product (GDP). Before we go deeper let’s clarify what it means. Gross domestic product is the monetary value of all the finished goods and services produced in a country in each year. It entails all private and public consumption, investments, adding exports and subtracting imports. Simple equation illustrates,

GDP = C + I + G + (EX-IM)

GDP is an important indicator of economic health of a country, used by many as proxy for standard of living. Is it the full picture? what about the pulse of the economy?

Note: arguments that relate how GDP does not capture standard of living is for another post.

I will consider the case for my country Saudi Arabia. The graph below shows the GDP level for Saudi Arabia across time (in millions), specifically 1970-2016.SAUDIGDP1970-2016

We see a rise from 1970 level compared with 2016 level, a large dip in the 80s, and a somewhat steady continuous rise. Consider now the growth rate of GDP. The growth rate of the economy is the percentage change of the GDP from one year to the next. Which explains how fast an economy is growing.

Gdp Growth 1960-2017.png

The graph above shows the growth rate of 46 years of Saudi Arabia. This graph does does not look as consistent as we thought it is by checking the first graph, when looking only at GDP level. Growth rate tells us a different story about the pulse of the economy, one that is far more interesting than the GDP level, where the only story is during the 80’s, which we can relate to in the growth picture. In that time frame Saudi’s GDP year on year declined by 20%.

Moreover, considering the case for Saudi we can see that it is far from being consistent or stable. However, if one would look at the level of GDP Saudi starting in 1970 compared to 2016 we can safely say that on average the growth rate for 46 years was 3.7%. Yet that is far from the truth now isn’t it.

Saudi GDP.png

As we know Saudi’s GDP stems from its oil production, then there must be a considerable effect from the oil price fluctuations. Oil prices are very volatile, check the two comparisons below. The left graph depicts the price of oil since 1986, where the right graph entails the change of oil prices year on year. We see that oil is very volatile across time.

Rplot03

Now let’s see how oil price fluctuations looks with Saudi GDP growth. Below we can see that there exists some sort of lag effect from oil prices on GDP. By lag I mean it might be that last year oil price change effects the following year in GDP growth.Oil GDP growth 86 vs Oil price change.png

There exists an intimate relationship between the change in oil price and GDP growth for Saudi Arabia. When one looks at GDP level we do not see the whole picture of the pulse of the economy. For a natural resource driven country we see plenty of volatility from its reliance on oil as main source of income. Yet we can conclude that in the long run (46 years) Saudi has grown on average 3.7% per annum.

Update* June 20th 2017

I acquired data that explains this relationship better. As the graph below shows, the Real GDP Growth of the Saudi Economy and Oil Sector growth. They exhibit a 0.77 correlation which indicates the intimacy mentioned previously.

Saudi RGDP growth and oil sectory growth.png