Arabia: Economic History



Figure 1.--This photograph shows two Saudi boys at a well near the town of Al Qunfudhah, in Makkah Province of Saudi Arabia (March 31, 1946). At the time the developing oil industry had not yet begun to change the country. The amazing aspect of the image is that it could easily had been taken centuries if not two millenia earlier. Notice the cammel that helped create trade routes (about 930-900 BC). Absolutely nothing had changed in Arabia for centuries, only the one boy's shirt looks the least bit modern. The people of Saudi Arabia were among the poorest and most backward in the world. The photograph is not in accord with the the western image of Arabia. But this was how most of the people of Arabia dressed. These boys were of course poor, but this was the state of most of the population.

Much of Arabia is covered by a desolate arid landscape which did not support agricultural. In a world that agriculture was the primnary genrator of wealth, this left the Arabian Peninsula and the people living there poor with little cultural development. Nor was there much mineral resources. The primary resource that the prople of the Arabian Peninsula had was geography--the location of the Peninsula. The Arabian Peninsula is situated between the Arabian Sea (Indian Ocean) and the Mediterrnen Sea. As there was no sea connection, trade routes criss crossed the Peninsula and imporant trding ports sprang up all along the perifery. This was the primary economic activity for centuries, involvement in trade or raiding those involved in trade. With the Islamic outburst, Arabs seized control of a vast empire (7th century). Important economic activity developed in this empire, but not in Arabia itself. Theone exception was the haj which brought considerable economic benefit to Mecc. Arabia's one economic assett (geography) was suddenly undercut with first the European maritime outreach (15th century). The Europeans were able to reach th East without relying on trade routhes through the Arabian Peninsula or ports on the perifery. The Suez Canal undermined the trading position of Arabia even further (1860s). As a result, the people of Arabia were among the poorest people in the world. Saudi Arabia when established as a nation state after World War I was very poor without a modern economy or education system. The region in general was desperately poor. Saudi Arabia was, however, poor and backward even by Middle Eastern standards. Most of the population lived a life virtually unchanged for centuries. This chanbged after World War II when oil discoverine began to be developed. The discovery of oil has brought vast wealth to the country, financing a rapid modernization campaign, at least in infrastructure and living standards if not in outlook. Saudi Arabia has an almost exclusively oil-based economy with strong government control, meaning the Saudi royal family, over the oil industry. Saudi Arabia at one time was believed to possess some 20 percent of the world's proven petroleum reserves. There was considrable difference of opinion on this issue as the saudi's are very secrtive about such matters. And now new innovative techniques developed in America have suceeded in finding substantial new resources. This has changed the calculation of proven reserves and peak oil. Now the cost of production have to enter into the calculation. Saudi Arabia can produce oil very inexpenbsively. The new oil being found is often much more expemsive to produce. Some of it may not be economic to recover, but it doies place a limit on what the sudis and other oil exporters can charge. The Saudis have been the largest oil exporter. They have played a major rolein the Organizatioin of Petroleum Exporters (OPEC), an international cartel that raised oil prices to very high levels, orcestrating a massive transfer of wealth from America and Europe to the Saudis and other major exporters. The petroleum sector accounts for almost all of Saudi government revenues as well as export earnings. The Government provides generous welfare benefits to Saudi citizens and employs much of the work force in Goverment agencies or corportions. The country has a rapidly growing populationand these welfare progrms are becoming increasingly expensive. This could become an important issue depending on where the price of oil settles out. Most workers in the country's private sector are foreigners. The Saudi Government promotes ecomnomic development to diversify the economy. They have made little progress in this area. There are non oil projects, but many of these projects are premised on inexpensive oil.

Ancient Era

Much of Arabia is covered by a desolate arid landscape which did not support agricultural. In a world that agriculture was the primnary genrator of wealth, this left the Arabian Peninsula and the people living there poor with little cultural development. Nor was there much in the way of mineral resources. The primary resource that the prople of the Arabian Peninsula had was geography--the location of the Peninsula. The Arabian Peninsula is situated between the Arabian Sea (Indian Ocean) and the Mediterrnen Sea. As there was no sea connection, between the Red Sea and Mediterranean, trade routes criss crossed the Peninsula. These trade routes existed in Biblical times even before the Roman Empire. The King’s Highway was a major trade route in the ancient Near East. It streached from Egypt east across the Sinai Peninsula to Aqaba. From there it turned northward across the Levnt to Damascus and onto Mesopotami and the Euphrates River. There were limitations on this trade because ancient socuties for milnnia only ad the donkey as a beast of burden and donkeys can only carry small loads. They also have limited range without water. Camels changed all this, but only arrived in the Levant in late-antiquity (930-900 BC). [Ben-Yosef and Sapir-Hen] The copper trade may have been what caused this. This period coincides with the invasion of Egyptian Pharoah Sheshonq I (Shishak) (925 BC) and could be related. The camel made possible trade routes into the heart of the Arabian Peninsula. Thus trade routes developed leading south. Israeli researchers write, "Our results have direct implications on dating the beginning of the Arabian trade and the many related economic and social phenomena. As most probably significant trade between southern Arabia and the Levant was not feasible before the use of camels as pack animals, it could not have commenced before the last third of the 10th century BCE.” [Sapir-Hen and Ben-Yosef] These are further suggested by the Biblical accounts of the King Solomon and the Queen of Sheba. [First Kings 10] Biblival scholars date the encounter (about 550 BC). This meant that well-established trading routes extending from Israel not only south to the southern Arabian Peninsula, but on to ancient Ethiopia. Imporant trading ports sprang up all along the perifery of the Arabian Peninsula, the Pesian Gulf, Arabian Sea, and the Red Sea. Trade was the primary economic activity for centuries, both involvement in trade or raiding the merchants involved in the trade. Conflict between the various tribes over control of the trade routes was endemic.

Islamic Era (7th century AD)

With the Islamic outburst, Arabs seized control of a vast empire (7th century). Mohammed's leadership helped defuse the fighting amongst the Arab tribs. Koranic teachings seem very harsh in our modrn world, but at the time they heped moderate the draconian social custims of the Arab tribal society. Under Mohammed the war-like energy of the Arab tribes unified for the first time was turned on the outside world, such as Gengis would do later with the Steppe tribes. Important economic activity developed in thes empire Mohammed would helped build. There were limited befebits to Aabia itself. The major benefit was trade. The Arabian Peninsula dominated the trade routes betweem India and the East with the Caliphate and on to Europe. This was a continuation of the economic activity during the ancient era. There was only one important change--the Isamic Haj. Islamic pilgrims brought considerable economic benefit to Mecca. And as aresult of the Caliphate economic engine. Many of thesepilgrims were prosperous. The cultural and economic development of Islam primarily occured in already develped sociries located to the north and west of Arabia where as part of the new Caliphate, the Golden Age of Islam unfolded. Here important advances were made in many importanyt disciplines, including mathemtics, medecine, an the phyical sciences (including astronomy, biology, chemistry, geography, and physics). But all of this occurred to the north. None of the great men of learning of the Caliphate, other than Islamic scholars, were from Arabia.

European Maritime Outreach (16th century)

Arabia's one economic assett (geography) was suddenly undercut with the European maritime outreach (15th century). After rounding the Cape of Good Hope, the Europeans were able to reach th East without relying on slow, vulnrable, and exoensive trade routes through the Arabian Peninsula or ports on the perifery. This broke the Arab monompoly on trade with the East. A consequence of emense economic importance. The Battle of Diu ended Ottompn/Arab control of the arabian Sea/Indiuan Ocean (1509). The Suez Canal undermined the trading position of Arabia even further (1860s). As a result, the people of Arabia gradually became among the poorest people in the world. There was very little agriculture and no industry. The economy at the beginning of the modern age was virtually unchanged from centuries earlier.

Ottoman Era (1517-1918)

The Ottoman Empire seized control of the Arab lands as a result of the Ottoman–Mamluk War (1516–17). The Ottomans previously had influence in the Arab lands, but not control of the major centers. Ottomam victory in the War led to the fall of the Mamluk Sultanate and the subsequent incorporation of the Levant, Egypt and the Hejaz as Ottoman provinces. The War transformed the Ottomans from a realm at the perifery of the Islamic world (Anatolia and the Balkans) to a huge empire including all the traditional lands of Islam, including the cities of Mecca, Cairo, Damascus and Aleppo. And possession of Mecca meant that the Ottoman Sultan could lay claim to be the supreme Islamic religious authority. The Arabian Peninsula itself was of only limited interest to the Ottomans. The reason for this was that most of the Peninsula was very poor. It would cost more to administer the Peninsula or control the tribes than any value which could be obtained. There was no industry and little or no manufacturing. And in the pre-indudtrial era, wealth was primarily generated by agriculture. But throughout the vast expanse of the Peninsula there was very little surface water and extremely limited precipitation meaning that agriculture was also very limited. The sultanantes such as Oman and the small Persian Gulf ports were of some interest because of trade. And the Hejaz or Western Province with Mecca and Medina was of interest for religious reasons. The Ottoman Sultans were able to established themselves as the highest authority in Islam because of a combination of military power and possesion of the Hejaz. And the Koran in contrast to the Western idea of separation of church and state envisions a unity between religion and the state. This meant that control of Mecca was vital. Thus outside of Mecca and the trade routes, the Ottomans showed no interrest in Arabia. Arabia in ancient times was of some economic value because of trade routes. The Arabian trade routes by the time the Ottomans seized the area (16th century) with an eye on the Indian Ocean. The Portuguese ended Ottoman/Arab control of the Indian Ocean at the Battle of Diu (1509). Diu meant that trade routes through Arabia no longer connected East and West which as a result of the Western controlled maritime trade was a major trade route. There was, however, some limited trade between India and East Africa and the Ottoman Empire. The Western navies which opened up trade with the East (China, the East Indies, and China) made no effort to interfere with this trade conducted by the small Arab dhows in the Indian Ocean. The only exception was when the Royal Navy began to end one element in that trade--the Indian Ocean slave trade. The only important Ottoman economoic development project we know of was the Hejaz Railway to Mecca whch the Ottomans built just before World War I.

Arab Revolt/World War I

Hussein ibn Ali al-Hashimi was the Hashemite Arab leader and became Sharif and Emir of Mecca (1908). At the time that meant he was a subject of the Ottoman Empire. When the Ottoman Empire entered World War I, he saw the possibility of Arab independence. The British encouraged him and provided financial and military support. The result was the Arab Revolt. . Hussein became King of the Hejaz (1916) and long with the British frive the Ottimabs out of Arabia and Palestine. Shoirtly after, however, his forces were defeated by the saudis (1924). This all occurred before the vast oil reserves of Arabia were known.

Saudi Petro-Economy

Saudi Arabia when established as a nation state after World War I was very poor without a modern economy or education system. The region in general was desperately poor. Saudi Arabia was, however, poor and backward even by Middle Eastern standards. Most of the population lived a life virtually unchanged for centuries. This chanbged after World War II when oil discoverine began to be developed. The discovery of oil has brought vast wealth to the country, financing a rapid modernization campaign, at least in infrastructure and living standards if not in outlook. Saudi Arabia has an almost exclusively oil-based economy with strong government control, meaning the Saudi royal family, over the oil industry. Saudi Arabia at one time was believed to possess some 20 percent of the world's proven petroleum reserves. There was considrable difference of opinion on this issue as the Saudi's are very secrtive about such matters. And now new innovative techniques developed in America have suceeded in finding substantial new resources. New techniques like fracking and horuzontal drilling may further increase reciverable reserves, but are also depressing oil proices. This is changing the calculation of proven reserves and peak oil. Now the cost of production have to enter into the calculation. Saudi Arabia can produce oil very inexpenbsively. The new oil being found is often much more expemsive to produce. Some of it may not be economic to recover, but it doies place a limit on what the sudis and other oil exporters can charge. The Saudis have been the largest oil exporter. They have played a major role in the Organizatioin of Petroleum Exporters (OPEC), an international cartel that raised oil prices to very high levels, orcestrating a massive transfer of wealth from America and Europe to the Saudis and other major exporters. The petroleum sector accounts for almost all of Saudi government revenues as well as export earnings. The Government provides generous welfare benefits to Saudi citizens and employs much of the work force in Goverment agencies or corportions. The country has a rapidly growing populationand these welfare progrms are becoming increasingly expensive. This could become an important issue depending on where the price of oil settles out. Most workers in the country's private sector are foreigners.

Economic Development

The Saudi Government promotes ecomnomic development to diversify the economy. They have made little progress in this area. Efforts to becone elf sufficent in wheat resulted in opening a system of farms with sprinklers drawing water from aquifers (1980s). They were able to grow enough wheat to feed most of the Saudi population. The aquifers were, however, a finite source and began drying out. The farms are no longer functioning and the Saudis are again importing most of their wheat. There are non oil projects, but most of these projects are premised on inexpensive oil. Some 15 percent of Saudi oil income has to be spent on water de-salinization. [Low] Without this enormous and growing expense, Saudi's large, modern cities would be impossible. Often we see comments extolling the modern buildings and infrastructure in nodern Saudi Aarabia. There is of course much more to the Saudi story than buildings, roads, air conditioners and cars. The Saudis were a still medieval people at the time oil was discovered. A time traveling Saudi in 1945 would not have found himself out of place in the 7th century, either in material possessions or cultural mindset. And all the material wealth has not yet findamentlly changed the Saudi cultural mindset. The oil wealth has made the Saudis first class 21st century CONSUMERS with cars, air conditioners, microwaves, computers, I-phones, etc.. But they have not made the Saudis CREATORS. No science comes out of Saudi, no pharmaceuticals no medical technology, not even any oil and gas technology. Here the Saudis are still less advanced than medieval Europeans. The Saudis like to say that they are diversifying their economy. This is a chimera. The economy is entirely based on oil. When they list diversification it is either petrol-chemical projects or activities like finance that are based on the oil wealth. Have you ever purchased a product from Saudi other than oil?

Saudi Arabia and the Gulf states are not democracies. Rather than move toward democracy, the monarchies have established a social contract. They will retain control of the country, but they will guarantee jobs and a decent life style to the people. With oil over $100 a barrel and peak oil looming, there seemed no limit to petroleum based prosperity. The 2014-15 drop in oil prices and continued low prices has fundamentally changed the economic situation. It is not clear how long low prices are going to persist and just how it will affect Waudi Arabia. A substantial revision of peak oil calculations, however, must inevitably affect a country so dependent on oil. High oil revenues have until now made it possible for policy makers to avoid making the tough choices needed to liberalize the economy, such as privatizing inefficent state-owned enterprises. The 2014-15 drop in oil oprices has significantkly affected the revenue if all the Gulf states and Saudi Arabia. As a result, all the state employment now eats a substantial portion of Government revenue. The public payroll is swollen by jobs that are essentially welfare. In many cases rhrhere is nmot even any workl to perform. Most of these employees actually have nothing to do. The oil industry is not a labior intensive industry. It does not employ many workers. Which is why the Saudis create so many government jobs with now work to do. One author writes, "Under Crown Prince Mohammed Bin Salman’s ambitious post-oil plan, the crucial role of finding jobs for them is supposed to fall to the private sector. The Saudi wage bill is enormous. The government, which employs about two-thirds of Saudi citizens who work, is chipping away at a budget deficit that ballooned to almost 16 percent of GDP after the oil shock of 2014. Last year, Saudi Arabia spent an estimated 440 billion riyals ($117 billion) on wages, nearly half of its total budget expenditure of 926 billion riyals, according to government data." [Fattah] The Saudis of all the Gulf states are in the worst situation. Of course the Saudi oil invcome is enirmous, the greatest of all the Gulf states, in fact of all oil exporters. The problem for the Saudis is that unlike the other Gulf states, has a a very large and growing population. Thus even the massive oil income cabn not provide the Saudis the ability to support the population to the extent the other Gulf states can. And the populatin continues to grow and the oil income declines, the future for Saudi Arabia presents challenges unknown since the discovery of oil. The Saudi people are not accustomed to creating wealth through hard work and creative energies rather than simply pumping oil. Wether they are capable of doing so is an open question.

Sources

Ben-Yosef, Erez and Lidar Sapir-Hen. Press release, Tel Aviv University.

Low, Michael. Iowa State professor

Ben-Yosef, Erez and Lidar Sapir-Hen. Journal of the Institute of Archaeology of Tel Aviv University (2013). Sapir-Hen is an archaeozoologist who studies the role of animals in ancient human culture. The camel is mentioned 47times in the Bible. Some of these pasages are in books describing very early points, perhaps 2000-1500 BC as oral history. But is was not until more recent times that they were actually written down and by that time the camel was well established and the people writing it down had no idea when the camel atually appeared.

Fattah, Zainab. "A ghost army of workers is paid to do nothing in the Gulf," Bloomberg (June 19, 2018).

Old Testament. First Kings





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Created: 9:20 AM 5/13/2015
Last updated: 8:02 PM 6/23/2018