Economic interdependence of Saudi Arabia and Pakistan through oil and labor

Abstract

The purpose of this study is to investigate the impact of oil price fluctuations and oil revenues on the main macroeconomic variables in oil based labor importing economies and labor exporting economies, represented by Saudi Arabia and Pakistan respectively. Numerous academic studies have addressed the issue of workers' remittances and oil price fluctuations. However, those studies have not used oil price fluctuations as a measure that affect investment and development plans in oil exporting countries and thus affect demand on laborers and jobs opportunity for foreign laborers which in turn will affect investment and income growth in labor exporting countries. By employing oil price fluctuations in this study, a much clearer understanding of the effects of oil prices fluctuations on macroeconomic variables in an oil based economy will be shown and how this effect will be transmitted to labor exporting countries through workers' remittances. While we expect the effect on an oil based economy to be direct, since Saudi Arabia is the largest oil producer in the world, the effects of oil price fluctuations on a labor exporting economy take place by directly affecting its macroeconomic variables and/or indirectly by affecting workers' remittances to Pakistan. Use of cointegration methodology and Error Correction Model in this study allows us to determine and analyze the causality, measure the impact and the magnitude of such impact. This can be done through identification of how oil price fluctuations affect variables such as investment, government expenditure, and income growth in both Saudi Arabia and Pakistan. The results indicate that oil price fluctuations have impacts on macroeconomic variables in both oil based economy and labor exporting economy. The Johansen Cointegration tests show that long term relationships exist among macroeconomic variables in our models. The Granger Causality tests indicate that oil price fluctuations and oil revenue cause both investment and income growth in Saudi Arabia. On the other hand, income growth in Saudi Arabia affects workers' remittances to Pakistan which in turn affect both investment and income growth in Pakistan. This means that oil price fluctuations indirectly affect macroeconomic variables in Pakistan. Moreover, oil price fluctuations also directly Granger causes investment in Pakistan. These results support the hypothesis that oil revenues in Saudi Arabia and oil price fluctuations not only affect oil producing countries but also labor exporting countries as well.