Cointegration and causality between economic growth, government sector and private sector in Saudi Arabia

In an age when oil prices are abysmally low, an important element for sustaining the growth of an oil-dependent economy like Saudi Arabia is to minimize the role of government sector and to encourage the growth of private sector. In fact, this is an important aspect of economic diversification. Empirical studies on analysing the relationship between government sector, private sector and economic growth is missing for Saudi Arabia. Using Johansen test of cointegration for the period 1970-2015, this study finds out that the three variables are cointegrated for Saudi Arabia. The study further indicates that there is a long-run causality running from both government sector and private sector to gross domestic product. This causality is missing in the short run. Finally, the study recommends re-structuring the salaries and taxation in the private sector.