Wheat, water, and Saudi Arabia

TL;DR

Saudi Arabia's wheat production was costly and unsustainable.

Transcript

This is a short tale about individuals who reject the ideas of comparative advantage and benefits from international trade. In the 1970s, Saudi Arabia ended up as a much wealthier country in large part because the price of oil had gone up so much. The Saudis then set out and decided that they were going to grow more food. Now, upon reflection, ... Read More

Key Insights

• In the 1970s, Saudi Arabia became wealthier due to rising oil prices, leading to efforts to grow more food domestically.
• Saudi Arabia lacks natural resources like lakes and rivers, making it an expensive place for agriculture, particularly wheat production.
• From 1980 to 1992, Saudi Arabia increased its wheat production significantly, becoming the sixth largest wheat exporter globally.
• The high costs of wheat production in Saudi Arabia were due to massive subsidies for water irrigation, making it five times more expensive than market prices.
• The production required 300 billion cubic meters of mostly non-renewable water, equivalent to six years of Nile River flow into Egypt.
• By 2008, Saudi Arabia decided to phase out wheat production due to unsustainable costs, aiming to end it by 2016.
• The decision to grow wheat was partly driven by the desire for national self-sufficiency and modernization, and the influence of a growing farm lobby.
• Saudi Arabia's wheat production initiative is a cautionary tale about the importance of comparative advantage and the benefits of international trade.

Questions & Answers

Q: Why did Saudi Arabia decide to grow wheat despite natural limitations?

Saudi Arabia decided to grow wheat to achieve national self-sufficiency, modernize the nation, and distribute wealth through subsidies. The decision was influenced by the country's wealth from oil and a burgeoning farm lobby, despite the lack of natural resources like water and arable land.

Q: How did Saudi Arabia manage to become a major wheat exporter?

Saudi Arabia became a major wheat exporter through massive subsidies for wheat production and water irrigation. Between 1980 and 1992, they increased production significantly, despite the high costs and environmental impact, eventually becoming the sixth largest wheat exporter in the world.

Q: What were the economic implications of Saudi Arabia's wheat production?

The economic implications included high production costs, with wheat costing $500 per ton compared to the market price of $120. The initiative drained financial resources and relied on unsustainable water use, highlighting the inefficiency of ignoring comparative advantage and the benefits of international trade.

Q: What environmental impact did Saudi Arabia's wheat production have?

The environmental impact was significant, as wheat production required 300 billion cubic meters of mostly non-renewable water, equivalent to six years of Nile River flow. This unsustainable use of water resources posed long-term environmental challenges for the country.

Q: Why did Saudi Arabia eventually decide to phase out wheat production?

Saudi Arabia decided to phase out wheat production by 2008 due to the unsustainable financial and environmental costs. The realization that relying on international trade was more economical led to the decision to end the program by 2016, with equipment left unused and rusting.

Q: What lessons can be learned from Saudi Arabia's wheat production initiative?

The key lessons include the importance of recognizing comparative advantage, the benefits of international trade, and the risks of unsustainable agricultural practices. The initiative serves as a cautionary tale about the economic and environmental consequences of ignoring natural resource limitations.

Q: How did subsidies affect Saudi Arabia's wheat production costs?

Subsidies significantly increased production costs, making Saudi wheat five times more expensive than the market price. The reliance on subsidies for water and agriculture distorted economic efficiency, highlighting the pitfalls of heavy government intervention in industries lacking natural competitive advantages.

Q: What role did the farm lobby play in Saudi Arabia's wheat production decision?

The farm lobby played a significant role by advocating for subsidies and promoting the idea of agricultural self-sufficiency. Their influence contributed to the government's decision to invest in wheat production, despite the country's lack of natural resources and the economic inefficiency of the initiative.

Summary & Key Takeaways

• Saudi Arabia's attempt to become self-sufficient in wheat production was driven by newfound wealth from oil but faced natural resource limitations. The country lacks sufficient water resources, requiring massive subsidies for irrigation, making wheat production significantly more expensive than importing it.

• Between 1980 and 1992, Saudi Arabia increased its wheat production dramatically, becoming a major exporter despite the high costs. The initiative heavily relied on non-renewable water resources, leading to unsustainable environmental and economic practices.

• By 2008, recognizing the unsustainability of their wheat program, Saudi Arabia decided to phase it out by 2016. The endeavor highlights the pitfalls of ignoring comparative advantage and the long-term benefits of participating in international trade.