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Export instability and the optimum export diversification: The case of Saudi Arabia
Abstract
AAs with many other developing countries, Saudi Arabia has experienced wide fluctuations in its export proceeds over the last two decades. This can be attributed to two factors: (1) heavy dependence of export proceeds on a single export commodity (commodity concentration) and few export markets (geographical concentration); (2) disturbances in international prices and demand for some commodities. A realization of the government's continuing efforts to develop the production capacities and to improve the competitiveness of Saudi products in local and international markets reveals that diversifying the export base and targeting profit-potential markets could be conducted on the context of portfolio analysis. The purpose of this study is to investigate systematically how a well-diversified export portfolio of commodities/markets would minimize fluctuations in export proceeds. In order to apply the Markowitz-Tobin mean-variance portfolio selection model, the growth rates and the variance of export commodities/markets are treated as returns and risk in the conventional portfolio analysis. An optimization problem to minimize instability in export proceeds subject to a given expected growth rate and some other constraints is solved. The problem set forth by the model is of a comparative static nature. It consists of deriving optimum export portfolios in which optimal shares of export commodities and markets are compared with actual shares. To achieve the goals of this study, low-, medium-, and high-risk strategies are demonstrated. Deciding what strategy is appropriate requires a comparison between the costs and the gains of diversification associated with each strategy. The study's findings reveal the dominance of some Arab countries in the composition of optimum export portfolios. That is, to reduce instability in export proceeds, exports to Syria, Lebanon and Yemen are recommended to be increased. The results also indicate that Saudi Arabia's largest industry, petrochemicals, need to be reorganized as the production is recommended to be reduced.
Subject Area
Finance|Business costs
Recommended Citation
Al-Hasan, Zayed Fahad, "Export instability and the optimum export diversification: The case of Saudi Arabia" (1997). ETD collection for University of Nebraska-Lincoln. AAI9730265.
https://digitalcommons.unl.edu/dissertations/AAI9730265