January 15, 2010

Effect of Laws, Regulations and Security Procedures on the Economic Performance of Saudi's Ports

Introduction

            Saudi Arabia is the biggest country in the Arabian Peninsula comprising eighty percent of the geographic area. Bodies of water bound the country on the east and west and by neighboring countries to the north and south. Since the discovery of oil in the early 1930s, propelling the country as one of the significant suppliers of oil in the international market, the development of ports in the country's waterfronts were instrumental in the trade of oil. The establishment of ports made it possible for Saudi Arabia to build industries required in trading oil particularly the shipping industry.

 

            Since Saudi Arabia is the leading exporter of petroleum products, it played a significant role in establishing the Organization of the Petroleum Exporting Countries (OPEC). As of 2003, Saudi Arabia reported control of twenty-four percent of the known world petroleum reserves or 260.1 billion barrels and its oil export capacity increases with the discovery of new oil fields. Petroleum industry accounts for around seventy-five percent of aggregate revenue, forty percent of gross domestic product and ninety percent of earnings derived from exports. The importance of the petroleum industry to Saudi Arabia necessitated the development of fully functional and efficient ports. At present, Saudi Arabia has established eight ports to cater to its massive trading activities.

            Saudi Arabia became a member of the World Trade Organization in December 2005. Preparatory to free trade, the country commenced the privatization of different industries in the late 1990s including its ports. Although ownership of ports still remain with the government, the private sector is given investment options in different areas to upgrade port facilities and services to compete with other ports in the region and comply with international standards. In 1997, the Ports Authority offered the ports, six commercial and two industrial ports, to the private sector through public bidding and prior to its membership in the WTO all ports were already operated and managed by the private sector.

 

            Competitiveness of Saudi's ports in the world market requires compliance with international standards. Standards are provided by the agreements or contracts that the ports have entered into through membership in the United Nations, World Trade Organization, Organization of the Petroleum Exporting Countries and other regional economic cooperation and the laws, regulations and port control or security procedures applicable in the international, regional and domestic sphere. These legal factors influence the economic performance of the different ports in Saudi Arabia.

 

            The paper will discuss the different international and national laws as well as the different port control regulations applicable to Saudi's ports and determine the manner and extent that the various laws and regulations influence the economic performance of the different ports.     

 Background of the Study

 

            It is recognized that law plays a significant role in the economic performance of states. This is because the legal environment constitutes a factor that affects the operations of businesses. Several approaches measure the extent and quality of influence that laws have on economic development. One approach is to consider laws based on the books. This means that the key indicators of a law are determined and the presence of these indicators are observed in a given economy. The presence or absence of any or some of these indicators then explains the influence that the law has on economic performance. This also requires looking into the purpose of laws and determining whether the purpose has been fulfilled by the presence or absence of the legal elements in the economy. (Berkowitz, Pistor & Richard 2000) In relation to port control, the elements and purpose of provisions of admiralty or maritime that relate to port operations are determined. After which an assessment will be made on the existence of these elements in the port industry in Saudi Arabia. Issues surrounding the implementation of the law are also considered. The impact of the legal provisions on the economic performance of the ports is determined by the manner that these laws support economic development in the port industry.

 

            Another approach is to consider the extent that laws are effectively enforced. This is because the presence of laws does not necessarily translate to law enforcement (Pound 1911) This is done by obtaining data measuring the effectiveness of the rule of law and the judiciary, the presence or absence of corruption, low levels of contract repudiation, and efficiency of government expropriation. (Berkowitz, Pistor & Richard 2000) In relation to port operations, applying this approach involves the consideration of the manner that key players in effectively implementing laws perform their functions so that the objectives of the law in supporting port operations are obtained. Information on the different measures of effectiveness should be obtained in order to assess the effect that these factors have on the economic performance of ports. In the case of corruption, the presence of a high level of corruption hampers the effective implementation of laws providing barriers to the achievement of economic development in the ports.

 

            The study conducted by La Porta et. al (1997, 1998) on the relationship of legality and economic development, used legality variables, which are rule of law, effectiveness of judiciary, non-existence of corruption, low risk of contract negation and low risk in state expropriation as measures of legality. The study also considered fluctuations in the gross national product in measuring the influence of legality variables on economic development in forty-nine states. The study showed that there is a strong association between legality and economic development. A linear regression coefficient showed that for every one percent increase in legality, there is a corresponding four and three quarters increase in gross national product. In substance, this means that in a state where the rule of law applies, there is an independent judicial system, there is no corruption, the government complies with binding agreements and utilizes revenue decisively; there is likely to be a higher GNP growth compared to other states.

 

            The relationship between the implementation of laws and economic performance is cyclical. On one hand, a strong association between law and economic performance implies that wealthy states have the resources to afford better legal institutions. On the other hand, efficient legal institutions are prerequisites to long-term economic development. (Posner 1998) In actual economic conditions, economic resources and legal institutions are co-determinants and both elements should be present for law to influence economic performance.

 

            In the course of history, law has always served to protect and regulate economic activities in consideration of private and public interests. According to North (1981) industrialization was spurred by the development of law and law enforcements mechanisms that protects private business endeavors. This is because law and legal mechanisms provided a secure atmosphere conducive to the growth and expansion of businesses. Law and legal institutions are keys to sustained economic growth (Knack & Keefer 1994; Landes 1998; Mauro 1995; Milgrom, North & Weingast 1990; North 1990; Williamson 1985). The relationship implies that a state should allot resources to the development of laws and legal institutions in order to support economic activities. The development of laws and legal institutions imply recognition and compliance of international law.

            Port operations and port related business ventures such as shipping involves complex activities on an international scale, which means that there is a need for laws that protects and regulated the various legal relations between the parties. Port operations involves the engagement in a plethora of contracts between the shipper and the shipping company, the loading and unloading of cargo with port services, the storage of goods in the port facilities, the insurance for the cargo being transported and other related contracts. As ports are flooded with the continuous entry and exit of goods as well as people from different states, there is an increasing demand to provide international standards for the safety and security of ports. The rationale for international standards is that deficiencies in port operations affect the business of a state's trading partners. Unsafe ports discourage other states to trade with a country because of a high risk of loosing its cargo. (Stopford 1997)

 

            International law is a body of laws applicable and binding upon all states. According to Higgins (1994, p.1), international law "is a normative system". It provides a system of performing conduct regarded as obligatory by the each member of the group and non-compliance involves a certain degree of punishment. Normative systems provide a mechanism for groups to realize order to achieve common good. International law is an "operational system for securing values that we all desire—security, freedom, the provision of sufficient material goods" (Higgins 1994, p.1). In the case of port operations, international law is the mechanism for meeting the common goals of states in relation to trade.   

            International law covering ports include shipping laws and laws of the sea and the conventions on port operations enforced by the United Nations, International Maritime Organization, World Trade Organization and other international bodies. Domestic law also governs port operations of a state. The aspects to be considered in studying the influence of domestic law on the economic performance of ports include domestic maritime laws, the existence of law enforcement institutions and the regulatory bodies.

 

Statement of the Problem

 

            In order to determine the effect of laws, regulations and security procedures on economic development of Saudi's ports, the researcher should gather data guided through the following questions:

1.      How did the port operations in Saudi Arabia develop?

2.      What are the characteristics of the present operations of Saudi ports?

3.      What is the competitive position of Saudi Arabia's ports in international trade?

4.      What international laws affect port operations in Saudi Arabia?

5.      What international bodies implement these international laws?

6.      What international agreements or conventions entered into by the government of Saudi Arabia are relevant to its ports?

7.      What bilateral and multilateral agreements have Saudi Arabia entered into that affects its ports?

8.      What domestic laws affect Saudi's ports?

9.      What port state control regulations are in place in Saudi Arabia?

10. What is the purpose of recognizing these international laws?

11.  What objectives are met by entering into conventions, multilateral and   bilateral agreements?

12.  What is the rationale for the port state control system in place?

13.  What mechanisms are present to ensure the enforcement of these laws?

14.  What are Saudi Arabia's short and long-term economic goals for its ports?

15.  Does the enforcement of international and domestic laws and regulations coincide with the economic goals of Saudi Arabia for its ports?

16. What are the different areas of port operations covered by law?

17. What issues or problems occur in the implementation of law on the different areas of port operations?

18. What are the conclusions and recommendations that can be derived from the experience of Saudi Arabia?

 

Objectives of the Study

 

            The general objective of the study is to determine the influence that law has on the economic performance of ports in Saudi Arabia. Specific objectives include the determination of the international and domestic laws and regulations affecting the economic performance of the ports, the determination of legal variables used to measure the influence of laws on economic performance of ports, and the determination of the economic measures to show the extent of influence that the legal variables have on the economic measures.

 

Significance of the Study

 

            The study is beneficial to the improvement of the port operations of Saudi Arabia because it provides an assessment of the role of law in the achievement of the economic goals of the state for its ports. The conclusions will show the nature and extent of influence that the different laws have on the economic performance of the ports and the recommendations provide suggestions on how Saudi Arabia can utilize the protection and regulation of different laws to optimize the realization of its economic goals in its ports.

 

Methodology

 

            The study will gather data through primary and secondary sources. Gathering primary data involves interviews of people with expertise, such as officials of the Saudi Port Authority, experts on the domestic and international laws governing port operation. The interview will be semi-structured to allow the researcher to obtain explanations or elaborations of answers to the interview questions to gain sufficient data on the different problem areas (Robson 2002).

Collecting secondary data involves the research of books, journals, commentaries, papers and other studies on the performance of Saudi Arabian ports, international and domestic laws governing port operations and the influence of these laws on the economic performance of ports. Secondary data include raw data and published summaries, as well as both quantitative and qualitative data. Secondary data fall into three main subgroups, which are documentary data, interview-based data, and those compiled from different sources. Documentary secondary data refer to studies that use primary data collection methods with the information used on their own or combined with other secondary data. Interview-based secondary data are those data collected by questionnaires that have already been analyzed. Such data are available as compiled data tables or as a computer-readable matrix of raw data. (Saunders et. al 2003)

 

            Data gathered will be presented through sub-topics to facilitate the organized flow of information. Data will be analyzed through a comparative law study method by comparing the similarities and differences in influence of the relevant laws, regulations, and security procedures affecting the economic performance of Saudi's ports.

 

           

           

 

Bibliography

Berkowitz, D, Pistor, K & Richard JF 2000, Economic Development, Legality, and the Transplant Effect, William Davidson Working Paper Number 308 February 2000.

 

Higgins, R 1994, Problems and Process: International Law and How we use it, Oxford University Press, Oxford.

 

Knack, S & Keefer, P 1994, 'Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures', Economics and Politics, vol. 7, pp. 207-227.

 

Landes, D 1998, The Wealth and Poverty of Nations, W.W. Norton & Co, Pennsylvania.

 

La Porta, R, Lopez-de-Silanes, F, Shleifer,  A & Vishny, R 1997, 'Legal

Determinants of External Finance', The Journal of Finance, vol. 52, no. 3,      pp. 1131-1150.

 

La Porta, R, Lopez-de-Silanes, F, Shleifer, A & Vishny, R 1998, 'Law and

Finance', Journal of Political Economy, vol. 106, no. 6, pp. 1113-1155.

 

Mauro, P 1995, 'Corruption and Growth', The Quartely Journal of Economics, vol. 110, no. 3, pp. 681-712.

 

Milgrom, P, North, D & Weingast, B 1990, 'The Role of Institutions in the

Revival of Trade: The Law Merchant, Private Judges, and the Champagne     Fairs.', Economics and Politics, vol. 2, no. 1, pp. 1-23.

 

North, D 1981, Structure and Change in Economic History (1st edn.) Norton, New York.

 

North, D 1990, 'Institutions, Institutional Change, and Economic Performance', The Political Economy of Institutions and Decisions. Cambridge University Press, Cambridge, New York.

 

Saunders, M, Lewis, P & Thornhill, A 2003, Research Methods for Business Students (3rd edn.), Prentice Hall Financial Times, London.

 

Stopford, M 1997, Maritime Economics, Routledge, London.

 

Posner, R 1998, 'Creating a Legal Framework for Economic Development', The World Bank Research Observer, vol. 13, no. 1, pp. 1-11.

 

Pound, R 1911, 'The Scope and Purpose of Sociological Jurisprudence', Harvard Law Review, vol. 24, no. 8, pp. 591-619.

 

Robson, C 2002, Real World Research (2nd edn.), Blackwel, Oxford.

 

Williamson, O 1985, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, Collier Macmillan, London.

 


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