China and Saudi Arabia

by Ossama Banaja
May 2002





The modern Saudi state was founded on 23 September 1932. The most important change the Saudi economy has experienced was the discovery of oil in the Eastern Province of the Kingdom by a United States company in 1938. The establishment of the Arabian American Oil Company (Aramco, later known as Saudi Aramco) triggered the need for new prosperities in the dessert Kingdom especially along the Persian Gulf coast. The discovery ended the Kingdom's isolation through introducing new ways to organize production and distribute goods and services. In October Saudi Arabia joined other member countries in moderate oil price increases through the Organization of Petroleum Exporting Countries (OPEC). After the 1973 war, the price of oil rose substantially, dramatically increasing Saudi Arabia's wealth and political influence. Combining the oil price crash in 1986, the Persian Gulf War, declining jobs, and the massive population growth, the Saudi government was forced to undertake several changes in order to adapt. A major shift in policy prompted the Saudization of the labor force, and a strong push towards privatization. Attempting to shift some of its attention away form the oil and natural gas industry, the government has made massive efforts to lure the population into a higher degree of education and skills. With privatization starting to take place and more opportunities opening up in the capital, Riyadh has grown at an average rate of 8.3% per year from 1974-1992 making it the fastest growing city in the Gulf.

Mao Zedong founded the People’s Republic of China in Beijing on October 1, 1949. Previously, China’s economy was plagued by high inflation and disrupted transportation links. Realizing that something must be done, a new political and economic order modeled on the Soviet example was quickly installed. The new leaders, and their implementation of the first five-year plan, gained popular support by curbing inflation, restoring the economy, and rebuilding many war-damaged industrial plants. The leaders felt they could do more with the second five-year plan, and thus adopted the Great Leap Forward campaign that sought to accomplish faster economic and technological progress; the result was an economic letdown. A new pragmatic leadership, instated in 1977, emphasized economic development and renounced mass political movements. Reform policies brought great improvements in the standard of living, especially for urban workers and for farmers who took advantage of opportunities to diversify crops and establish village industries. At the same time, however, political dissent as well as social problems such as inflation reemerged. Following the resurgence of conservatives, economic reform slowed until Deng Xiaoping's dramatic visit to southern China in early 1992 renewed its momentum. Deng's renewed push for a market-oriented economy received official support. Deng argued that managing the economy in a way that increased living standards should be China's primary policy objective, even if "capitalist" measures were adopted. Subsequent to the visit, the Communist Party Politburo publicly issued an endorsement of Deng's policies of economic openness.

Religion and Tradition

Establishing a sovereign Muslim state that regards the Shari’a (Islamic law) as its constitution was the driving force behind the conquest of the two holy cities of Mecca and Medina in 1924, and finally the liberation of Saudi Arabia. Islam was a major factor that influenced Saudi foreign policy. Solidarity with Muslim countries in Asia and Africa was an important objective. Since the 1970s, countries such as Bangladesh, Pakistan, and Somalia have received special consideration in terms of foreign aid because of religious affinity. From an Islamic perspective, it was permissible to maintain diplomatic relations with non-Muslim states that were not hostile to Islam. Saudi relations with non-Arab and non-Muslim countries consisted primarily of commercial ties to the countries of Western Europe, Japan, and South Asia. All these countries were important customers for Saudi oil. In addition, Saudi Arabia imported a wide range of consumer goods from Japan, Germany, Britain, Italy, and France. Countries such as India, the Philippines, Sri Lanka, and the Republic of Korea (South Korea) also supplied thousands of foreign laborers for the Kingdom. As the custodians of the two Holy mosques, Muslims worldwide look at Saudi Arabia to accommodate them in their obligatory pilgrimage to Mecca. The US$5 billion airport built in Jeddah with its 1 million pilgrim capacity Hajj Terminal were only possible because of the sudden easing of financial constraints in the mid-1970s. The pilgrimage comes in second place as a percentage of the Kingdom’s GDP, only to be vastly superseded by the oil industry. Jeddah’s estimated 2 million inhabitants view the hajj season as the propelling force behind their economy.

The old values of the Chinese people were not removed with the establishment of the People’s Republic of China, changes such as rural land tenure and education did not come at the cost of traditional values such as family structure. China's traditional values were contained in the orthodox version of Confucianism, which was taught in the academies and tested in the imperial civil service examinations. These values are distinctive for their worldly emphasis on society and public administration and for their wide diffusion throughout Chinese society. Confucianism, never a religion in any accepted sense, is primarily concerned with social order. Social harmony is to be achieved within the state, whose administrators consciously select the proper policies and act to educate both the rulers and the subject masses. Confucianism originated and developed as the ideology of professional administrators and continued to bear the impress of its origins. The Confucians claimed authority based on their knowledge, which came from direct mastery of a set of books. These books, the Confucian Classics, were thought to contain the distilled wisdom of the past and to apply to all human beings everywhere at all times. The mastery of the Classics was the highest form of education and the best possible qualification for holding public office. The way to achieve the ideal society was to teach the entire people as much of the content of the Classics as possible. It was assumed that everyone was educable and that everyone needed educating. The social order may have been natural, but it was not assumed to be instinctive. Confucianism put great stress on learning, study, and all aspects of socialization. Confucians preferred internalized moral guidance to the external force of law, which they regarded as a punitive force applied to those unable to learn morality. Confucians saw the ideal society as a hierarchy, in which everyone knew his or her proper place and duties. The existence of a ruler and of a state were taken for granted, but Confucians held that rulers had to demonstrate their fitness to rule by their "merit." The essential point was that heredity was an insufficient qualification for legitimate authority. As practical administrators, Confucians came to terms with hereditary kings and emperors but insisted on their right to educate rulers in the principles of Confucian thought. Traditional Chinese thought thus combined an ideally rigid and hierarchical social order with an appreciation for education, individual achievement, and mobility within the rigid structure


The discovery of oil in the 1930’s has made rapid economic development possible, this development intensified in the 1960s and accelerated spectacularly in the 1970s, transforming the kingdom. Oil accounts for more than 90% of the country's exports and nearly 75% of government revenues. Proven reserves are estimated at more than 260 billion barrels--about one-quarter of world oil reserves. Saudi ARAMCO produces more than 95% of all Saudi oil on behalf of the Saudi Government. In June 1993, Saudi ARAMCO absorbed the state marketing and refining company (SAMAREC), becoming the world's largest fully integrated oil company. Operating in the former neutral zone, the Japanese-owned Arabian Oil Company (AOC) and the Saudi subsidiary of Texaco, Saudi Arabian Texaco, provide the rest of Saudi crude oil production. Due to a sharp rise in petroleum revenues in 1974 following the 1973 Arab-Israeli war, Saudi Arabia became one of the fastest-growing economies in the world. It enjoyed a substantial surplus in its overall trade with other countries; imports increased rapidly; and ample government revenues were available for development, defense, and aid to other Arab and Islamic countries. Higher oil prices, however, led to development of more oil fields around the world and reduced global consumption. The result, beginning in the mid-1980s, was a worldwide oil glut, which introduced an element of planning uncertainty for the first time in a decade. Saudi oil production, which had increased to almost 10 million barrels per day (b/d) during 1980-81, dropped to about 2 million b/d in 1985. Budgetary deficits developed, and the government drew down its foreign assets. Responding to financial pressures. Through 5-year development plans, the government has sought to allocate its petroleum income to transform its relatively undeveloped, oil-based economy into that of a modern industrial state.

While maintaining strict communistic control in their political framework, China, since 1978, has moved from a centrally planned economy towards increased market orientation. The shift has increased the authority of local authorities and managers in industry, allowed for small enterprises to emerge, opened the door to foreign trade, and most importantly diverted from a system of collectivization to increased peasant responsibility in agriculture. The result of this was quadrupling of the GDP to $4.5 trillion, making it the second largest economy in terms of purchasing power. During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price setting, and labor systems. During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zones and the influx of foreign capital that these zones facilitated. Fearing hyperinflation, Chinese authorities called in speculative loans, raised interest rates, and reevaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. In 1996, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation; the economy has been slowing since then, with official growth of 8.9% in 1997, 7.8% in 1998, and 7.1% for 1999.

Decentralization and Diversification

In December of 1978 the Chinese leadership recognized the failure of the central planning in their economy to produce the needed economic growth to keep pace with the industrial economies of the west and Asia. A step-wise reform was made to increase the role of market mechanisms in order to aid the existing communistic structure. The first three years of the reform, dubbed “The Period of Readjustment”, focused on correcting the imbalances of the economy. The most substantial reform policy was introduced in agriculture; the policy dismantled the commune system and introduced a household responsibility system that shifted most of the decision making to the peasant farmers. The main policy reforms in industry aimed to reduce the emphasis on production quotas, and increased the independence of enterprise managers. In response to the reforms, average rates of annual growth climbed to 10% in agricultural and industrial output. The surplus of labor was absorbed by the 23% increase in agricultural output and the doubling of per capita income in rural areas. The reforms also allowed individual enterprises outside the Ministry of Foreign Trade to negotiate directly with foreign firms. Seeing the great benefits that the period of readjustment brought to all sectors, the next period was regarded as a period of reforming the economic system and opening to foreign trade. By the end of 1988, due to the massive price reforms, inflation soared. In response, the Chinese leadership slowed the reform process bringing it to a virtual halt. The visit to southern China by then leader Deng Xiaoping's reenergized the economy and triggered the continuation of the reform process. The ten-year plan of the 1990’s marked the maintenance of the political structure, while announcing bold economic reforms, the goal for China was to build a “socialist market economy.”

The crash of oil prices in 1986 caused a similar, but smaller-scale, reform in the Saudi economic policy. The main objective of the reform was to strengthen government finances, but the implementation of a policy that would accomplish that was not easy. Initial plans of selling development bonds, decreasing foreign assets, and cutting expenditure helped stabilize the budget deficit. As the oil market returned to stable conditions, Saudi policymakers adopted two initiatives. Major steps, including the large-scale upgrading of refineries, were taken in order to promote investment in the oil market. The second initiative was to revive the private sector in response to the need for a higher degree of diversification. At the forefront of the revival process was the reform of the financial sector. By doing so, the leadership was looking to ease the process of financing private sector investments. Protecting these investments was made possible by the restrictive tariff and non-tariff barriers that the Saudis implemented under the guise of the Gulf Cooperation Council. The sixth 5-year plan was important in respect to diversifying the economy by curtailing the oil businesses’ share of the country’s GDP; it calls for the nurturing of the petrochemical industry and other non-oil sectors such as agriculture, manufacturing, and merchandising. The plan also caused the formation of a negotiation team in an effort to join the World Trade Organization.



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