Are Saudis more productive than Germans?
I’m sure this post is wrong, but I’d be interested in finding out the precise way that it’s wrong.
I was recently looking at an international ranking of GDP/person in PPP terms, and noticed something strange. The per capita GDP for Saudi Arabia ($53,624) is higher than for Germany ($46,893).
I know what you are thinking: Oil, lots of oil. But is that the explanation?
The GDP for Saudi Arabia was $1,683 billion in 2015. As far as I can tell the Saudis produced about 10.25 million barrels of oil a day last year, or a total of roughly 3.75 billion barrels. Oil seemed to average about $50/barrel last year, for a total of about $187.5 billion in oil output. That means the non-oil sector of the Saudi economy produced about $1,495.5 worth of output. If we divide that number by the Saudi population (about 31.3 million in 2015) we get $47,780/person in output, even excluding the entire output of their oil industry. That’s more than Germany! These are all IMF figures, but the World Bank isn’t much different.
What did I miss?
1. I subtracted nominal oil output from total PPP GDP. That might seem like comparing apples and oranges, But oil is internationally traded, and I used international oil prices. So the oil sector needs no PPP adjustment.
2. Lots of Saudi output is produced by foreigners. Yes, but the 31.3m population figure includes foreigners.
3. Saudi non-oil output is only possible because the oil wealth finances it. So does that mean that if we give Bangladesh foreign aid equal to 12.5% of their GDP, they would be able to boost per capita output to German levels? I don’t think so.
4. The IMF’s PPP estimates are way, way off. But the other sources reports similar or even higher levels of Saudi GDP (PPP).
I vote for #4. But it still seems odd that multiple sources would produce similar numbers that are all wildly incorrect. If so, why? The IMF and the World Bank employ highly skilled economists. Wouldn’t that be a major scandal?
Or are Saudis actually more productive than Germans? If so, isn’t that a huge story?
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25. August 2016 at 14:15
Scott, how much do government price controls and subsidies affect PPP? Saudi Arabia heavily subsidizes energy. Up until the end of 2015, the price of a gallon of gas there was about 61 cents. And even though the government has raised prices due to its budget deficit, the price of a gallon of gas is still less than $1.
25. August 2016 at 14:33
Not sure how you got your average oil price, but averaging across time is probably the wrong measure. My guess is the Saudis sell more when prices are high, and less when low — on a week to week basis, so your average price is biased down.
Second question would be about the deficit the saudi govt ran last year — I believe it was substantial. If the government is willing to fund a standard of living, it should be able to.
25. August 2016 at 14:39
World Development Indicators is showing Saudi Arabia as having oil rents of 38.7% of its GDP as of 2014. There’s something off here.
25. August 2016 at 14:40
I like #3. The production of oil and ongoing spending of oil wealth has created and sustained a massive amount of upstream support services and downstream consumption. The international aid, on the other hand, is more like the “give a man a fish” portion of the old proverb.
25. August 2016 at 14:51
I vote for “Saudis are more productive than Germans”
Urban population rate and service sectors are killer
25. August 2016 at 14:57
If you used that logic, you could take out most of the rest of Saudi’s exports too. Their top exports are mainly primary goods like aluminium, chemicals or plastics (that are reliant on oil). Not to mention, these resources need other capital too which needs suppliers so their benefit for GDP would be bigger than just the net export figure would it not?
In comparison, Germany’s top exports are far more complex like vehicles, electronics, pharmeuticals etc that aren’t just basic resources and require much better human capital.
I’d say it’s simply that Saudi Arabia is a resource rich country and Germany isn’t.
25. August 2016 at 14:59
http://www.forbes.com/places/saudi-arabia/
” The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings.”
If oil is 45% of the GDP, without oil the per capita of Saudi Arabia will be 29,493.
25. August 2016 at 15:00
I don’t think your rationale for ignoring #1 is correct. Isn’t there just one PPP factor for each country? I.e, to get from nominal to PPP we just multiply total nominal by a single factor to get total PPP? Which then brings us back to #4. I don’t think PPP is a very meaningful measure for a country in which a major portion of its production is an internationally traded commodity.
25. August 2016 at 15:16
Following up on Gordon’s comment:
The “oil sector” is not just crude oil, but includes refined products, like gasoline. So when Wikipedia says the Saudi GDP is 55% “oil sector”, this includes all the other stuff, maybe even natural gas and refining.
Saudi Arabia has an (exchange rate) GDP per capita of about $21K. To get to $53K requires a big PPP adjustment. The (huge) PPP adjustment includes something for gasoline and energy prices generally, plus other subsidized sectors (health?).
The combination of these two facts suggests that it’s the Germans who are more productive.
25. August 2016 at 15:18
http://www.tradingeconomics.com/saudi-arabia/indicators
The difference betwenn GDP per capita (21313 USD) and GDP per capita PPP (50284 USD according to tradingeconomics, or 53624 USD according to world bank) seems so big that some strange thing should be happening (perhaps extremely low prices by subsidization?).
http://www.indexmundi.com/saudi_arabia/gdp_(purchasing_power_parity).html
But in 2013, the GDP PPP of Saudi Arabia (in 2013 USD) was $927.8 billion, meaning a GDP per capita of around 30.000 USD (almost half than in 2015!).
25. August 2016 at 15:22
The average Saudi IQ is in the 80s -low. Lower, when you exclude foreigners. So there’s no conceivable way Saudi Arabia can be much more productive than, at the very best, Mexico when going it without oil. Consequently, the high GDP per capita must be caused solely by the obvious -the oil. Take a look at Equatorial Guinea’s GDP/capita when it struck oil:
https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:VNM:IDN:KHM&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_pp_kd&scale_y=lin&ind_y=false&rdim=region&idim=country:VNM:IDN:KHM:GNQ&ifdim=region&hl=en_US&dl=en&ind=false
Yet, total oil production per capita is only 6.5K dollars -way lower than EG’s 33K GDP per capita (PPP).
I believe it to be a combination of #3 and #1. Oil subsidizes a lot of Saudi and EG economic activity, beyond its direct contributions to it. Saudi Arabia can afford to develop farms in the desert and skyscrapers, Equatorial Guinea can afford to develop hospitals and roads. Also, since domestic prices are lower than foreign ones, the money from the oil revenues can buy more goods and services within the oil-exporting countries than it can internationally.
25. August 2016 at 15:24
http://databank.worldbank.org/data/reports.aspx?source=2&country=SAU
In 2015 Saudi Arabia had a deflation of 17%, in terms of GDP deflactor; this could have some effect? Perhaps oil revenues, in terms of GDP, are being valued by oil prices of some years ago?
25. August 2016 at 15:28
Gordon, That should have no effect on PPP data.
James, I doubt they sell more at high prices than low prices, as even a genius cannot predict oil prices. But even if they did, the range was $40 to $60/barrel, so it would have only had a trivial impact on my calculation.
Ryan, That may be based on nominal GDP, and oil prices were far higher in 2014, as compared to 2015.
Randomize, Sorry, but I don’t follow your logic. If we gave the Bangladesh government that amount of money, they could build lots of infrastructure. Or the Saudis could waste the money on French Riviera vacations. In any case, even if the oil money did spur development, isn’t it surprising that Saudis are equally productive as Germans at building those projects? (And I’d guess those projects are only a small share of GDP, in any case.)
Ben, Both Germany and Saudi Arabia are major chemical producers, so I see no difference there. And I doubt the other resources (non-oil) are that big a share of GDP.
Miguel, Those are nominal figures, I am looking at PPP data. My hunch is that the PPP adjustments are way off.
Jeff, You asked:
“I don’t think your rationale for ignoring #1 is correct. Isn’t there just one PPP factor for each country?”
Yes, but you can remove any sector as long as you use PPP prices in doing so. I did that with my $50/barrel assumption.
25. August 2016 at 15:30
I don’t think migrant workers count as part of the population. The number of migrant workers equal 40% of the population.
25. August 2016 at 15:41
You can’t subtract nominal oil prices from PPP-adjusted GDP and get something meaningful. In nominal terms German GDP per capita is $40997 and Saudi’s is $20813. So that means Saudi oil production of $6000 per capita represents close to 30% of their output.
This is a case of PPP adjustments being way off when you are comparing countries that are far apart on the income scale. In this case the extreme inequality in the KSA makes matters worse, because non-tradeable goods and services are going to be super cheap compared to Germany.
25. August 2016 at 15:54
For fun, I voted for the contrarianism,
but,”PPPs are way off” is very possible.
How about SDR or some currency buscket terms?
25. August 2016 at 16:23
Given large inequality the GDP/person (i mean average person) is probably half of 48,000. And deficit spending probably reduces it by another 20-30%.
25. August 2016 at 16:31
The whole petroleum sector is more than half GDP
25. August 2016 at 16:38
I note your response to Miguel above. But I think just general manufacturing as % GDP is much higher in Saudi Arabia. We shouldn’t be surprised that a country with a relatively tiny agricultural sector has a more productive workforce.
25. August 2016 at 16:52
Offshore investments mean onshore income?
They get a lot of revenue from global holdings of stocks, property and bonds.
25. August 2016 at 19:49
Scott, crude oil extraction isn’t the be all and end all of the oil industry. Downstream processing (refining and plastics production, for example) falls under manufacturing, not mining under the national accounts. KSA owns more than 5% of the world’s refining capacity. Using the market value of oil production severely understates the importance of oil to the KSA economy.
Also, believe it or not, up to a few years ago, the Saudi’s were big wheat producers:
http://www.bloomberg.com/news/articles/2015-11-04/saudi-wells-running-dry-of-water-spell-end-of-desert-wheat
25. August 2016 at 21:30
Scott,
$50/barrel was the average nominal price of oil in 2015, not the Saudi PPP adjusted price. Using World Bank data, the nominal GDP/capital was about $20,640, which means the PPP-factor was about 0.38. So if you adjusted the nominal price of oil by the Saudi PPP factor you should get $130/barrel. Using your same calculations I get a PPP-adjusted non-oil GDP/capital of about $38,208. Still seems high to me (#4 still an issue) but lower than Germany.
25. August 2016 at 23:27
Don’t you need to subtract oil from NGDP before adjusting for PPP? Losing $1 of oil income would reduce NGDP by $1, not PPP-GDP. So I’d guess #1, although #4 likely plays a role as well.
To those who point to oil refining, etc: SA could still refine oil whether or not the oil comes from SA. This is not relevant to Scott’s question.
26. August 2016 at 03:01
Isn’t this a mean vs median thing? We want to know what the median individual productivity is. Per capita GDP is really the vast wealth and incomes of a few families divided by a population with some trickle down , and some actual investment also.
Investments are probably mostly in those things that those rich folks need – which may spin-off. So, high-end hospitals, high end schools, some nice roads out to a nice airport. Nice houses and marinas. Some of which is also of course what the foreign workers want. and plenty of cheap servant labour.
Best thing when as SS says a nation sells off its capital like oil is to set-up a sovereign wealth fund like Norway, etc. And then use that to do rational healthcare, pensions, and housing like Singapore.
26. August 2016 at 05:01
“So does that mean that if we give Bangladesh foreign aid equal to 12.5% of their GDP, they would be able to boost per capita output to German levels?”
If we gave Bangladesh 1T$ (nominal) in international aid (i.e. 2.3T$ PPP) each year for 60 years, I would not be surprised if it became a rich country.
26. August 2016 at 05:28
Supporting #4, the CIA fact book says petroleum is 42% of GDP, and the budget deficit is 13%. So without oil, and the government borrowing it supports, GDP would be 55% lower. Reconciling the 2 data sets is an exercise left to the reader, as they say.
https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
26. August 2016 at 05:57
GDP nominal (2013 but what the heck) is 750 billion or so. Knock off $250 billion (oil was higher then). $400 billion, PPP multiplier is 0.4, so 2.5 times 400 billion, 1,200 billion.
No, still looks too high. 2013 oil prices were double, weren’t they? Knock off $400 billion then. 2.5 times $350, $900 billion or so, 30 million people, $30,000 per capita. That still looks high actually. But sounds more likely than more than higher than Germany.
26. August 2016 at 05:59
Everyone, Sorry, but there are a lot of inaccurate comments:
1. Saudi population includes foreign residents.
http://www.arabnews.com/saudi-arabia/news/697371
2. My first point was stated in a confusing way. I did not subtract nominal Saudi oil output from PPP GDP, I subtracted oil output at international prices from PPP GDP. That’s the correct way to do it. I’m not interested in nominal Saudi GDP. This post is about PPP GDP, and I used international oil prices.
3. Other industries like refining have no bearing on my claim about the productivity of Saudi workers. As commenter Jason said, the Saudi’s could have imported oil and refined it.
4. The comments about living standards have no bearing on my claim, I am looking at productivity, not living standards. Nor does the median/average distinction have any bearing. Yes, it would matter for living standards, but it has no bearing on my claim about average productivity.
5. Claims that oil is a large share of the Saudi economy use nominal GDP, which has no bearing on my PPP GDP claims.
6. Industries that only exist due to subsidies (i.e. wheat farming) should even further reduce Saudi productivity.
7. It makes no sense to claim the Saudi’s are much less productive than Germans, and then choose an answer like #3 that implies they are just as productive.
8. PPP GDP absolutely can swing wildly from year to year, based on terms of trade effects from wild swings in oil prices.
26. August 2016 at 06:15
“Are anti-Fed articles appearing in mainstream publications part of an extended program of tearing down the Fed in order to remake it as part of a global central bank?
Recently published anti-Fed arguments and their nearer-term motives have been commented on with considerable accuracy by various alternative-media entities. These arguments are compellingly presented. But step back, please.”
– all from daily bell…but very relevant to topics discussed here
26. August 2016 at 07:26
It’s an interesting question. At first glance, as you note, the amount of oil isn’t enough to make Saudi Arabia wealthy. I don’t think all of it can be PPP being off. Saudi’s, especially citizens live very well. I am deeply skeptical of the notion that Saudi Arabia, in the absence of massive oil, would be nearly as wealthy as it is today. Actually, I suspect it would be one of the poorer countries ofthe world. My guess is that there are a massive amount of industry and services that are ancillary to the oil industry. It’s easier (I know nothing about the oil industry, so this might be completely false) to refine petroleum at the same location drilling happens. I am sure there are a lot of services like engineering, or financial services associated with the oil industry, etc. All of these would add to the GDP of Saudi Arabia. Not sure if this makes sense though.
26. August 2016 at 07:48
It’s possible the Saudi productivity is a little higher than expected because of the quality of the expatriates they are able to attract with all that oil money.
26. August 2016 at 08:25
You also need to look into annual hours worked per worker and the size of its workforce. For instance, even though Canada has a GDP PPP per capita income almost 10% higher than that of France, productivity in France is almost 20% higher than in Canada, owing to differences in employment rates and working hours.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_hour_worked
26. August 2016 at 08:46
Off topic, but J. Bradford is talking up helicopter money;
http://www.bradford-delong.com/2016/08/why-do-we-talk-about-helicopter-money.html#comment-6a00e551f08003883401b8d215f2df970c
————quote———–
Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.
The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.
If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be.
————endquote———-
That second paragraph ought to say that the past decade has taught us that ‘sterilizing the QE with interest on excess reserves’ has taught us that ….
But, he’s right in his comparison of fiscal policy.
26. August 2016 at 08:46
“It makes no sense to claim the Saudi’s are much less productive than Germans,”
-They aren’t, but they surely would be if they didn’t have the oil.
There are probably some papers on this out there.
26. August 2016 at 09:08
A quick googling and I get 2013 Saudi GDP at $784 B. I don’t think their economy has grown 2.5x in the last 2 years.
So, I would start with verifying quality of your top line number.
26. August 2016 at 09:59
“I subtracted oil output at international prices from PPP GDP. That’s the correct way to do it. I’m not interested in nominal Saudi GDP. This post is about PPP GDP, and I used international oil prices.”
Why wouldn’t you subtract oil output at international prices from Nominal GDP then do the PPP adjustment on the resulting sans-oil NGDP figure? Wouldn’t that be the accurate way to do it?
Using your method the assumption is that every $ of oil output affects PPP Saudi wealth by its nominal amount which makes no sense to me
26. August 2016 at 10:05
Patrick Sullivan: Send in the Sikorksys, the Hueys, the Chinooks. Darken the skies.
This is no time for sermonettes on inflation from little boys in short pants.
26. August 2016 at 10:35
@gnikivar: you are exactly right, oil is the base, and then so much else flows from that which isn’t counted as ‘fossil fuel industry’. Accountants, lawyers, investment pros, restaurants, airlines, taxis, it goes on and on. Oil is the straw that stirs the drink. Take it away and the economy looks like Jordan at best, Yemen at worst.
This is the fallacy Art Deco and others fall into when they quote some fact book about % of an economy devoted to an industry. Like claiming Russia or Oklahoma aren’t truly dependent on resource extraction because it’s only 15-20% of GDP. The indirect effects are massive. When oil collapses, so much more collapses with it than just jobs in the oil patch in places like that.
26. August 2016 at 13:08
I believe that HW makes a good point. Demography gives Saudi Arabia an edge.
Also, I tend to agree with SD000. It seems to me that oil production should be subtracted from nominal GDP. But Scott Sumner is the economics professor here, so I may well be wrong.
Otherwise, it does seem that getting large amounts of “foreign aid ” (i.e. 6-12k$ per person per year) and investing much of this in diverse infrastructure, investment funds and education, combined to an openness to foreign labor, may well have made the country pretty productive.
26. August 2016 at 15:09
Tim, There is no PPP multiplier for oil, so if you take oil out then you need a much bigger multiplier. If it was 2.5 before, you might need 3.5 without oil. That’s because you are subtracting oil at international prices, and hence no multiplier applies to oil.
gnikivar, There are two issues raised by your comment. Are Saudis actually as productive as the data suggests (I doubt it.) And if I am wrong, can oil explain the very high productivity in the non-oil sectors (I doubt it.)
Carl, Maybe, but lots of them are maids, and other unskilled workers. Also, many Saudi employees are hired for “affirmative action” reasons, and are told to not even show up at work, given their low productivity.
HW, Good point.
Doug, Are those PPP figures?
E. Harding, Why?
SD0000, You asked:
“Why wouldn’t you subtract oil output at international prices from Nominal GDP then do the PPP adjustment on the resulting sans-oil NGDP figure?”
Because the PPP price is the international price. And how would I know what PPP adjustment to make to their nominal GDP, excluding oil? See my response to Tim.
msgkings, Actually, your Russian example is a poor choice. Oil prices fall in half, and the non-oil sector in Russia does not collapse. In Texas, oil prices fall in half, and the state keeps booming.
Everyone, You are ignoring the primary issue here, which is PRODUCTIVITY. Oil wealth, or foreign aid, doesn’t magically make PEOPLE more productive. If their refinery industry were in fact highly productive (in a value added sense), it would also be highly productive if it used imported oil. Money doesn’t change culture, it doesn’t change education levels. If money was the problem, we would not have countries stuck in the middle income trap.
26. August 2016 at 15:10
LK, How has foreign aid worked in Africa? Why do western firms report that Saudi workers are so useless that they tell them not to even show up at work?
26. August 2016 at 15:44
How is GDP PPP really calculated?
Every thing produced in Saudi Arabia is multiplied by its price in the United States and the final result is the GDP PPP? Or first it is calculated the “regular” GDP, and then this value is multiplied by a number representing the ratio between the general price level in the USA and a general price level in Saudi Arabia?
I think that subtracting the nominal value of oil from the GDP PPP only makes sense if the first methodology is used; if GDP PPP is calculated by the second methodology, I think that then the criticism of dbeach, Jeff G., Jason, etc. is correct.
26. August 2016 at 16:06
Dr. Sumner, I think there is a huge confusion with #1. Let’s say Saudis produce something they sell internationally for X US dollars and everything sold domestically is Y riyal. Let’s say that z is exchange rate for riyal (z riyals for 1 greenback) and w is number of riyals that will buy you the same stuff in KSA as $1 will buy you in USA. Now, total GDP in US dollars is X+Y/z, total GDP in riyals is z*X+Y, and
(X+Y/z)/w is GDP in PPP dollars. As you see, X enters with 1/w factor, which you didn’t take into account when subtracting.
26. August 2016 at 17:12
Sorry, that should have been “w is number of dollars that will buy you the same stuff in KSA as $1 will buy you in USA”.
26. August 2016 at 19:42
I don’t get why you picked Germany in the first place. Why didn’t you point out that Saudi Arabia is as productive as the US? And basically for the same reasons: Demographics, a legal but highly selective immigration system and a small welfare state for (illegal) immigrants.
26. August 2016 at 21:36
You used PPP gdp but subtracted nominal income due to oil?
May be compare nominal gdp.
Also there is effect of accumulated wealth?
Kind of like interest and dividend income?
27. August 2016 at 03:05
Sumner’s #4 is correct, the PPP is an artificial dollar. For example, it assumes a “pizza” in Saudi Arabia is the same as a pizza in the USA–not true. The pizza outside of the USA (and outside of say the mid-Atlantic corridor) is markedly inferior to the US version. Look at Pakistan’s GDP in PPP vs USD, and note the big difference. You realize PPP is fake once you live in foreign countries for more than a month, like I have (lived in four so far).
OT–why is Sumner back from vacation so soon? School year is immaterial now that he’s retired. He should enjoy himself a bit more IMO.
27. August 2016 at 03:06
The IMF has Saudi NGDP per capita at about $20k, and German NGDP per capita at about $40k, in 2015. So the PPP difference comes from a really big difference in the IMF’s estimate of the price level in each country. How does the IMF calculate that? I wouldn’t be surprised if it were (way) off…
On the other hand, a more apt analogy with Bangladesh would involve the US giving in cash a very large percentage (maybe over 100%?) of Bangladeshis non-aid GDP every single year over many decades, with productivity and GDP rising over time until in 2015 the payments equal 12.5% of Bangladesh’s GDP. Stated that way it doesn’t seem (as) implausible that Saudi oil wealth has enabled, over a long period of time, a high level of productivity.
I wonder if we’re also possibly confusing labor supply with productivity. How many labor hours do Germans take to produce their GDP? How many do Saudis take? Are Germans taking lots of vacations, and Saudis working 12/7/365? Does Germany have a lot of idle young people and retirees, and Saudi Arabia not?
I realize that I should just look this up myself but I’m on vacation with intermittent Wi-Fi and about head out for the night…
27. August 2016 at 06:15
Miguel, It’s the second, but their criticism is not correct, see my next post.
D.O. and Nirav, See my next post.
Christian, Because it’s non-oil sector is not as productive as the US.
Ray, It wasn’t really a “vacation”, I rarely take them anymore.
Jacob, Good points.
28. August 2016 at 08:41
“If their refinery industry were in fact highly productive (in a value added sense), it would also be highly productive if it used imported oil.”
OK, I will preface with Scott’s favorite…”I’m not an economist, but…”..also not an expert on Saudi business…but
Production of aluminum and plastic bulk material are usually ways to turn stranded gas (or in the case of Iceland, very cheap geothermal energy) into a form that can be exported. Qatar and the Saudis have huge fields of natural gas that can only be exported in a couple of ways. 1) More pipelines, 2) GTL, 3) LNG, 4) production of aluminum, plastic, other refined products. The protectivity of these industries could be very poor and still be highly competitive because they are getting their raw materials basically for free.
28. August 2016 at 08:53
Engineer, You are not an economist . . . but you think like one.
🙂
28. August 2016 at 11:29
“but you think like one” Thanks (I think)…
The only other thing that I will add is that you mentioned that they have a lot of low skilled foreign workers. I’m sure that is true, because Saudi women do not work outside the home, and Saudi men will not do menial labor… but they also hire a lot of western engineers, and I know a couple of them. A chance to go live in a walled city in the desert for a couple of years, earn 3X your salary, nearly tax-free, and retire early…..
29. August 2016 at 21:25
I am late to the party, and also another engineer, but here’s my 2 cents. I think part of the answer is that in Saudi Arabia there are many capitally intensive downstream industries based on oil and gas, as already mentioned, like refineries, petrochemicals and so on. The question was raised as to why can’t these industries be based in other countries. Well the first thing to mention is logistics costs – if you have to transport your oil by ship to a refinery, then transport the products to the ultimate consumer you have doubled the shipping cost (or more) plus you also have additional storage as well. Margins on these sorts of products are tiny and so refineries either are sized for their local consumers (so avoiding having to transport the refined products very far) or are located close to the source (so avoiding the transportation of the crude oil). But most local markets are actually fairly limited in size and you therefore don’t get the same economies of scale that you would get if you located near to the source of the oil. So the Saudi’s can have the biggest and most efficient refineries. In addition there are significant network effects associated with these industries. Refineries and petrochemicals use each others byproducts. So it is much easier to add another downstream product to an already complex refinery, which makes it bigger, which again makes it more attractive for other products and so on. Hence the reason why you can’t just build a plant in South Africa for instance and expect it to be as productive as one in Saudi Arabia.
The other thing to note is that the Saudi’s are very good are using expatriate labor (as is much of the middle east). Pakistani’s are fantastic welders for instance and very cheap and willing to work very hard for long hours. Buy in Western Managers to supervise them and use European based engineering companies you are basically making an incredibly efficient way of constructing petrochemical plants. Equipment is sourced from where ever in the world is the best. Contrast this with most other countries, there are all sorts of rules of what labor you can use (try importing welders into Germany for instance), and there are also all sorts of other restrictions as well. So it is just not possible to do these new big facilities in the west anymore.
These downstream plants are highly capitally intensive, and employ very few people relatively speaking so the measured productivity per person should be very high, so I wouldn’t be surprised to see this sector significantly raise the overall productivity of the country.
30. August 2016 at 09:27
Thanks ChrisA, But keep in mind that industries like refining are a very small share of Saudi Arabia’s PPP GDP.