Economic Diversification and Comparative Advantage: Case of Saudi
This final project is intended to bring together the conceptual ideas about international trade presented in class and have you apply them to the study of one country. The end product will be a short paper, no less than 1500 words (about five double-spaced pages). You should feel free to write about whatever topic (relevant to international trade) you want. Want to explore, say, how copycat generic drugs from India have impacted pharmaceuticals markets? Go for it. Interested in the history of illegal ivory trade from Kenya? Great! Want to investigate the Maquiladora boom in Mexico? Awesome. Is your idea related to the international trade in goods and/or services? That will do just fine.
If you would like more structure, here is a basic one that might suit you: Imagine that you work as an analyst for an international consulting company. Your firm is looking for business opportunities in a new country. Your boss asks you to provide background information regarding this country’s trading history. You will want to provide plenty of factual information. For example, what and how much goods the country exports and imports. How has the country’s trade position changed over time (say, the last 50-75 years)? You might include graphs showing changes overtime. What factor inputs are abundant/scarce? What does the country seem to have a comparative advantage in producing? What are government policies toward trade? Any barriers to trade we should know about? You will want to be able to answer these basic questions in your paper.
If you don’t have inspiration for which particular country you want to focus on, I suggest it be a country large enough to be interesting(and have information out there) but not large enough so as to be overwhelming. You might try countries like Canada, Spain, Saudi Arabia, South Africa, or Argentina.
You are invited to focus on one or more “specialty” topics related to trade that we were able to cover only briefly (if at all) in class. You might be interested in things like immigration patterns for your country, inequality, trade treaties, howyour country treats intellectual property, outsourcing, taxation of multinational corporations, environmental regulations, and any other area of interest that might relate to trade.
If you’re not sure whether or not your topic is acceptable, please ask the instructor.
I want you to feel free to make this project your own. The rubric posted below is a rough guide, at best. The hope is that as you start investigating your country, you will discover some aspect of your country’s experience in international markets that you will really want to explore. If you write primarily about that and, of course, relate it to the ideas presented in the class in a thoughtful way, you will do well. If, on the other hand,your paper is a mishmash of bits and pieces you’ve lumped together from all corners of the internet, you will do badly.
Requirements
1500+ words
Focus on a single country
You are free to choose any topic, related to international trade, that is relevant to that country
A clear introduction
A clear conclusion
This is a paper, not a presentation or list of bullet points. As such, you first need an introduction that informs the reader what your paper is about (aka, your“thesis”). Each paragraph of the paper must relate to your thesis in some way. If it doesn’t, it probably doesn’t belong in the paper. By the time you get to the end of the paper,all your paragraphs must accomplish what you set out to accomplish in the thesis. Then write a one or two paragraph conclusion that ties everything up.
You must connect your paper to class content in a significant way. Which class content will depend on your topic. Whatever you choose may have relations to Heckscher-Ohlin, Stolper-Samuelson, Ricardo,Monopolistic Competition, Tariffs, Treaties, or any other topic we have covered. You might write a really good paper, but if it is not something that you can relate to our class in a meaningful way, then it is not appropriate for this assignment.
Plagiarism – stating or implying that another person’s work is your own – is unacceptable. Please (re)visit the University's tutorial on Academic Integrity for basic guidance on what constitutes proper usage of other people’s work versus what is considered plagiarism. This website from Purdue University https://owl(dot)english(dot)purdue(dot)edu/owl/resource/930/01/provides suggestions to avoid common pitfalls when it comes to plagiarism. If you plagiarize and are caught, ignorance is not a defense. The University is unforgiving when it comes to plagiarism cases. You do not want to do this.
I hope that this assignment serves to help better connect the conceptual material that forms the bulk of the class to real-world experience. Remember, you are free to pick any (trade-related) topic that interests you. Have fun!
Economic Diversification and Comparative Advantage: Case of Saudi Arabia
Introduction
Benjamin Franklin, an American statesman, was once quoted saying, "no nation was ever ruined by trade." This statement has been proven right because the overall benefits of international trade on the economy remain strong. For countries to engage in international trade, certain frameworks have to exist, including advantages that countries have over each other. In this case, the Ricardian model of comparative or absolute advantage expresses that countries trade in commodities they produce more efficiently in exchange for those that they do not. Saudi Arabia has been one of the few countries in the world that efficiently produces oil and gas, which makes this product the primary export. Recently, Saudi Arabia and other gulf countries have undertaken to diversify their economies, which means investing in other industries and sectors of the economy. The primary question that remains is how such a move affects the country and its partners’ comparative advantage. Most importantly, the question of how Saudi Arabia can build a comparative advantage across the newly established sectors and industries need to be explored. The focus of this paper is to explore Saudi Arabia's comparative and absolute advantage for both oil and the new sectors and industries and to examine how the new position affects the country’s international trade dynamics.
Economic Diversification and Comparative/Absolut Advantage in Saudi Arabia
Before examining the consequences of Saudi Arabia's diversification in international trade, it is important to present an understanding of the Ricardian theory of comparative advantage. This theory holds a general position that when two countries are engaged in cross-border trade, then each will specialize in the goods with which they have a comparative advantage (Bahar). Absolute advantage is achieved when a country uses fewer resources to produce goods. In the case of Saudi Arabia, only a few other countries in the world are endowed with oil and gas. As a result, Saudi Arabia has an absolute advantage over those countries that do not produce oil and have to purchase it from Saudi Arabia. Comparative advantage is the scenario where producing goods costs less in one country than in another, which also helps facilitate trade between the two countries. Such efficiencies could be achieved due to such differences as labor, especially if the two countries. For example, if Saudi Arabia was to trade oil with the United States, a country with its own oil resources, then the costs of purchasing oil from Saudi Arabia would have to be lower than local production in the United States.
Due to the absolute and comparative advantage that Saudi Arabia has over other countries across the world, oil and gas have remained the primary exports and, in many ways, the primary means of economic growth and development. The oil resources have been used to build a remarkable economy, which makes Saudi Arabia one of the richest countries and the fastest-growing in terms of infrastructure on the planet. After several decades of being an oil-based economy, Saudi Arabia has seemingly learned critical lessons regarding the detriments of overreliance on only one commodity. Across the gulf countries, the need to diversify has received renewed urgency after the COVID-19 pandemic, which has resulted in a slump in oil prices (Kabbani and Mimoune). Global crises often tend to reflect immediately on the oil prices where the reduced purchasing power of nations forces the prices to go down. In other cases, a growing supply of oil and related products in the international market is another factor that causes oil prices to fluctuate constantly. A stable economy cannot be built on highly volatile trade commodities, which explains why the gulf countries have been forced to diversify their economies.
With diversification, it implies that Saudi Arabia is using the proceeds of its international trade to invest in other sectors. The private sector remains heavily incentivized by the government, which means that production is dependent on inputs from the government. A question worth asking is whether this model of diversification influences the country's comparative and absolute advantage. The answer to this question can be found by assessing the areas in which the country invests. Among the various pillars of Saudi Arabia’s diversification include international tourism, entrepreneurship, and education (Euchi, Omri, and Al-Tis 1). Even though the country has managed to build infrastructure and improve the lives of its people, it can be observed that major projects and other economic activities have often required the importation of labor. Investing in education can be perceived as a means of building a local workforce that can take up the jobs that run the economy. In the short term, the heavy investments may seem counter-productive, considering that it might be cheaper to import labor. In the long run, all the wages paid to expatriates could be reverted to local workforces, which further improves the country’s gross domestic product.
Reducing reliance on imported labor helps Saudi Arabia improve its comparative advantage in this regard....