Causality between the Construction Sector and Economic Growth: The Case of Saudi Arabia

Abstract

This study empirically investigates the relationship between construction flow and economic growth for Saudi Arabia during the 1970–2011 period. Integration and cointegration techniques are applied to investigate the relationship between the construction sector and economic growth. Given the fact that Saudi Arabia is an oil-rich country, oil revenue has also been included in the model as a conditioning variable. The findings reveal that there is strong causality that runs from economic growth and oil revenues to the construction industry with feedback effects that only run from construction to economic growth (i.e. bi-directional relationship). However, the construction industry does not Granger-cause oil revenues in the longrun (i.e. uni-directional relationship). The findings also reveal that there exists no causal relationship between economic growth and oil revenues in the long-run. Economic growth and oil revenue are “independent” effects on construction growths in the long-run. However, oil revenues have significant effects on economic growth just in the short-run. Therefore, oil revenues play a critical role in economic growth in the short-run and therefore, the growth of the construction industry in the long-run. The accuracy of the estimated results is validated by performing several diagnostic tests.