On Saudi Arabia: Its People, Past, Religion, Fault Lines - and Future (24 page)

Looking forward, the single healthy dimension of the Saudi economy—oil—cannot be counted on to fuel economic growth far into the future. Oil will continue to gush for some years to come, of course, but Saudi reserves are steadily being depleted, and no significant new discoveries have been found to replace them. Some energy experts are convinced that current reserves are substantially lower than those officially claimed by the Saudis and that the depletion rate is substantially faster. Beyond that, domestic consumption of oil is rising rapidly, reducing the amount the kingdom will have to export for revenue in future years.

Indeed, declining oil for export and rising domestic spending to maintain political stability mean the kingdom’s expenditures will exceed its oil revenues as soon as 2014, say experts at Jadwa Investment, a large financial institution in Riyadh. “
By 2030, foreign assets will be drawn down to minimal levels and debt will be rising rapidly,” these experts predict, unless the kingdom takes decisive steps to reverse the trend of domestic consumption and spending, which are outpacing oil production for export. As a result, the Saudi regime is under ever more pressure to diversify the economy while it still has time and while oil revenues still are there, to invest in other sources of long-term economic growth. The fading of the finite resource has broader implications for Saudi Arabia’s relationship with the United States, as we shall see in
chapter 15
.

Oil is one Saudi addiction; imported labor is the other. This dependence on foreign workers is the most glaring current symptom of a dysfunctional Saudi economy. The effects are widespread unemployment among young Saudis and all-too-pervasive poverty.
Not only is unemployment among young Saudis fully 40 percent,
but 40 percent of all Saudi citizens live on less than 3,000 Saudi riyals ($850) a month. Those twin sad statistics, all the more glaring in a society that flaunts so much wealth, are precisely the sort that led to protests and revolutions across much of the Arab world in 2011. In Saudi Arabia, a nervous regime reacted in its usual fashion by doling out hundreds of billions of riyals in new handouts to every sector of society, from the military and
religious establishments to students, the unemployed, and the poor. While the king’s new spasm of welfare spending may have bought time, it did nothing to alter the structural causes of unemployment, poverty, and declining standards of living for the Saudi middle class.

Quite the opposite.
The king’s decision to institute a minimum wage for government jobs, offer two-month bonuses to government workers, and create an additional 126,000 government jobs (60,000 to beef up security forces and another 66,000 for teachers and health diploma holders) will together give young Saudis even less incentive to prepare and compete for productive jobs in the private sector.
With this latest largesse, public expenditures have tripled since 2004, while the private sector’s contribution to non-oil GDP has stagnated. Until productivity increases in the private sector, per capita income in Saudi Arabia will continue to lag, holding down the standard of living for most Saudis.
Indeed, adjusted for inflation, real per capita income has been stagnant since the middle of the 1980s at roughly $8,550.

High birthrates, poor education, a male aversion to manual labor or service roles, social strictures against women working, low wages accepted by foreign labor, and deep structural rigidities in the economy, compounded by pervasive corruption, all have led to a decline in living standards and to the toxic and intransigent unemployment problem among young Saudis. Many of these young feel their future is being stolen from them, that their lives will not be as prosperous as those of their parents.

Imported labor in itself is not a sign of economic sickness. A full-employment economy that imports labor to further spur productivity and growth—a Singapore, for example—benefits both its own citizens and the expatriates it employs. In Saudi Arabia, it is the opposite. An unproductive economy with widespread unemployment is importing labor to perform functions that its own citizens are neither educated nor enterprising enough to perform. Even the minister of labor acknowledges that Saudis aren’t qualified for the jobs they want and refuse the jobs for which they are qualified.
So while the private sector created some 2.2 million
jobs between 2005 and 2009, only 9 percent of those went to Saudis, who prefer the short hours and job security of government employment, which all too often is unproductive and therefore a drag on the economy.

Over the past decade, the government has announced one plan after another to “Saudize” the economy, but to no avail. The foreign workforce grows, and so does unemployment among Saudis. Once again the latest five-year plan calls for reducing unemployment among Saudis to 5.5 percent by 2014, but almost certainly that goal will not be achieved.
The previous plan called for slashing unemployment to 2.8 percent only to see it rise to 10.5 percent in 2009, the end of that plan period. Government plans in Saudi are like those in the old Soviet Union, grandiose but unmet. (Also, as in the old Soviet Union, nearly all Saudi official statistics are unreliable, so economists believe the real Saudi unemployment rate is closer to 40 percent.)

The net effect is a society that, however tranquil on the surface, seethes with discontent. The unhappiness is not confined to unemployed young men or to subjugated women but extends broadly across the Saudi middle class who, however divided by region, tribe, or religiosity, share a common frustration with economic stagnation, the declining standard of living, and lack of opportunity for their children. Even traditional Saudis reared in an environment of acquiescence and obedience are increasingly cynical about the pillars of Saudi stability, the Al Saud and its religious establishment. At best they view them as out of touch with the plight of normal people; at worst they see them as self-serving and corrupt.

In any Western democracy, such broad social discontent would be reflected first in public opinion polls showing the leadership with, say, only 30 percent public approval, and then in elections that would result in changes in leadership. In Saudi Arabia, there are no reliable opinion polls, and there is no way of replacing leaders. So society seethes, the Al Saud tinker, and little changes as the one-dimensional Saudi economy continues to stagnate rather than evolve into a more diversified and productive one.

Sadly, it is fair to ask whether this is the way the Al Saud
regime prefers it. A modern and diversified economy would have to be accompanied by a much more open, enterprising, and diverse society, one over which the Al Saud and the religious establishment inevitably would have fewer levers of control. Since the days when Abdul Aziz dispensed clothes and food to those who came to his palace, keeping people dependent on the royal family has been a tenet of Al Saud rule. To the ruling family, political control trumps economic competitiveness. But decades of rapid population growth, coupled with the people’s near-total dependence on government largesse, have smothered enterprise and left the Saudi economy unproductive and uncompetitive.
Now, as in the days of King Abdul Aziz, the Saudi rulers claim to offer security and prosperity in exchange for political obedience and social conformity. These days, however, both ends of the tether binding Al Saud and Saudis are fraying.

Yes, in recent years the Chinese Communist Party has succeeded in unleashing enormous enterprise and global economic competitiveness while retaining ultimate political control. The Al Saud, however, are neither as confident nor as competent as China’s rulers, and Saudis are not nearly as enterprising as Chinese. While the long-impoverished Chinese people were hungry enough to sacrifice to build a modern economy, the largely government-supported Saudis have been listless enough to expect one to be delivered to them. So, sadly, the more apt comparison is to the old Soviet regime, where decrepit leaders presided over a dysfunctional economy and an increasingly sullen society until the country’s collapse in 1991.

One may well wonder why a country with oil revenues in nominal dollars that ranged from $39 billion in 1978 to $285 billion in 2008 (
down to $215.3 billion in 2010, when prices fell from 2008’s historic highs) couldn’t over three decades create an economy that functions at or near full employment. The ironic answer is that oil wealth actually has inhibited economic development. Given its plentiful oil revenues, the kingdom hasn’t, at least until very recently, seriously focused on becoming competitive in any other economic sphere.

Every five-year plan since the first one in 1970 has called for diversifying the economy beyond oil, but oil is still supreme. “
At least 85 to 90 percent of treasury still is oil or oil related,” says Khalid al Falih, the Saudi Arabian CEO of Saudi ARAMCO.

Nearly 60 percent of Saudi gross domestic product is generated by a monopolistic public sector that includes government-owned entities such as Saudi ARAMCO, Saudi Arabia Basic Industries Corp. (SABIC), and the Royal Commission at Jubail and Yanbu, which dominate the petrochemical industry. Even today manufacturing accounts for only about 10 percent of Saudi GDP, and 65 percent of that is petrochemicals, which are competitive in world markets thanks largely to cheap Saudi oil and gas feedstocks.

In Western countries, wealth is generated by the private sector and taxed by government. In Saudi Arabia, wealth is generated by government-owned industries (largely Saudi ARAMCO) and flows to the private sector, which depends on government for contracts and subsidies to sustain its production. Because the regime prefers mammoth government projects, private capital can find little in which to invest productively. So while precise numbers are not available, most experts believe a majority of Saudi private investment is parked abroad.

The megaprojects that the government favors and funds almost invariably suffer from long delays and large cost overruns.
A 2011 survey of three hundred project managers and supervisors found that 97 percent of government projects are not completed on time, and a staggering 80 percent of them exceed budget. “The most dangerous aspect of the matter is that most of the project supervisors, who are government officials, do not find any fault with the delay and do not have to worry about the immensity of such a national waste,” says Turki al Turki, an expert in development and management of projects, who conducted the survey.

One such project, King Abdullah’s much-ballyhooed (as the world’s largest women’s university) new Princess Nora University near Riyadh, was budgeted at 6 billion Saudi riyals and wound up costing nearly 30 billion, according to
a knowledgeable Al Saud prince.
Arab News
, the kingdom’s major English-language daily, reported that the university was budgeted to cost 15 billion Saudi riyals ($4 billion) when construction began in October 2008,
but it actually had cost 20 billion ($5.3 billion) by the time it opened in May 2011, a 33 percent cost overrun in just over two years. Whatever the precise numbers, not surprisingly, Saudi citizens are angered at the enormous scale of such government waste of the public patrimony.

To transform this subsidized economy into a productive one that creates jobs, the government will have to allow a more competitive industrial base to develop that leverages both foreign technology and investment. Despite a lot of rhetoric about developing a “knowledge” economy, little has been achieved.
One sad snapshot of Saudi competitiveness: the number of Saudi patents registered in the United States between 1977 and 2010 was a grand total of 382, compared to 84,840 from South Korea and 20,620 from Israel. (But thanks to Saudi ARAMCO, the originator of most of the Saudi patents, the kingdom is far and away the largest patent holder among Arab countries.)

The kingdom now has yet another plan—its ninth formal five-year plan—to diversify beyond oil and boost job creation. The plan is called Vision 2020 and aims to double the size of Saudi Arabia’s manufacturing sector to 20 percent of GDP. “
We want to move from inherited wealth—oil—to acquired or created wealth,” says Dr. Khalid al Sulaiman, deputy minister of commerce and industry, who was in charge of the latest plan. (He resigned that post in June 2010 to become vice president for renewable energy at the King Abdullah City for Atomic and Renewable Energy.) The plan acknowledges that the kingdom must make progress on many fronts at once, including reducing government red tape that hinders the start-up or expansion of businesses.

Just lending more money to start new businesses won’t be enough unless the kingdom finds a way to spur innovation and technological competitiveness. While the government in the 1970s was successful in creating giant petrochemical
industries because of cheap oil and gas feedstocks and because it could provide the huge capital needed to launch such an industry, what is needed these days is not just capital but technological innovation, entrepreneurial spirit, and creative minds, all three in short supply in Saudi Arabia.

If planning equaled progress, Saudi Arabia would already be an economic dynamo.
In addition to the new Industrial Development Strategy, or Vision 2020, it has developed a new five-year National Science and Technology Innovation Plan, backed by $2.2 billion, to encourage innovation.
A Higher Education Plan, or Horizons, is working its way through the government approval process to reform university education to produce graduates who are not simply unquestioning robots but rather inquiring and innovative entrepreneurs. The Saudi leaders of these three plans are as impressive and dedicated as any country could muster. All three hold doctorates from U.S. universities and exude commitment to their plans’ goals. But the chasm between planners and people remains deep and wide.

Beyond government plans and projects, Saudi Arabia has a private sector where a handful of big business names like Bin Laden, Olayan, Zamil, Mahfouz, and Al Rajhi dominate the service sector. This sector is led by construction and real estate, both heavily dependent on government spending, which again is dependent on oil revenues. Most of these big-business families, whose fortunes were made largely through connections to the Al Saud, have diversified their holdings beyond the kingdom so their personal wealth is no longer as heavily dependent on government contracts.