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Saudi
Economics and Saudi Stability: The Facts Behind the Speculation
Anthony H. Cordesman
The
death of King Fahd and the succession of Crown Prince Abdullah have
unleashed a flood of articles on Saudi stability, the Royal family,
Saudi security, and Saudi economics. Many of the latter articles
have been badly out of date, and many make assertions that are
simply wrong. It may be useful to point out a few facts.
The
Structural Pressures for Saudi Economic Reform
Saudi
Arabia does need economic reform. This is a point that King Abdullah
has been stressing for years, and it is driven in large part by
demographics. There is no reliable way to estimate Saudi population
growth, but the latest UN report on World Population Prospects
(2004) estimates that Saudi Arabia grew from a nation with only 3.5
million in 1950 to one with 24.6 million in 2005.
Even
if a major reduction takes place in the Saudi fertility rate, the UN
estimates that the population of Saudi Arabia will grow to 30.8
million in 2015, 37.2 million in 2025, and 49.5 million in 2050. So
far, Saudi Arabia and most Arab states had not experienced a decline
in fertility rates of the kind the UN estimates -- which is based
more on Asian than Middle Eastern experience.
This
issue is critical because the UN estimates indicate that Saudi
population growth will decline from an average annual growth rate of
2.8% during 1995-2005, to 2.69% in 2000-2005, 2.17% during
2006-2010, 1.76% during 2020-2025, and 0.83% in 2045-2050.
Among
other things, this rate of decline tacitly assumes a major increase
in the role of women in the work force and a major change in Saudi
family values to permit far more population planning. If these
changes do not occur, Saudi population growth could be far higher.
Even
if the UN figures prove to be right, it is difficult to postulate
any scenario where Saudi Arabia will not see a serious decline in
per capita oil export earnings even if it does achieve the UN's
estimated decline in population growth.
Saudi
Arabia's September 2004 census found a total population of 22.67
million vs. 24.6 million for the UN and 26.4 million for the CIA.
The Saudi census found that there were 16.53 million Saudis (72.9%)
and 6.14 million foreigners (27.1%). Population growth averaged
2.45% from 1992 to 2004, including foreigners, and 2.49% for Saudis
- substantially lower than outside estimates of 3% or more, and the
UN's 2.69%, but not enough to radically alter the UN estimates.
Moreover,
Saudi Arabia has a very young population. Some 37.3% of its
population is in the 0-14 years of age group, which compares to
20.8% for the US, 17.9% for the UK, and 14.3% for Spain. The UN
estimates this figure will drop from 37.3% to 19.9% by 2050, but
Saudi Arabia faces at least two decades of sharply increasing demand
for jobs before this decline will affect new entrants to the labor
force.
The
CIA (World Factbook 2005) estimates that the median age of Saudis is
now only 21.3 years of age, and that some 247,000 Saudi males now
reach the age where they should enter the labor force each year. If
women and men were fully employed, the total number of potential job
entrants would each 500,000 a year. This is a massive increase in a
country where the labor force is now estimated to be 6.62 million,
of which less than 4.3 million is estimated to be native Saudi.
The
scale of these pressures is hidden in a great deal of reporting on
Saudi Arabia by estimates that restrict the work force using
definitions that sharply reduce the number of Saudis said to be
seeking work. As a result, sources like the SAMBA Financial Group
report male unemployment as being only 8.8% for 2005 - a rate that
has climbed from 6.7% in 1999 in spite of a massive increase in oil
expert earnings. The CIA, however, estimates an unemployment rate of
25% -- which seems to include disguised unemployment as well as
direct unemployment. This 25% rate is also based only on males, and
reporting the total disguises the fact it is very heavily
concentrated among younger males.
No
one who looks at these figures can ignore the problems they raise
for stability. They are also compounded by a number of factors that
almost all analysts agree upon:
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The
low rate of job creation in the petroleum sector.
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Gross
over-employment in the government sector, much of it in hollow
jobs.
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The
creation of extended family jobs in the service sector - jobs
created by friends and relatives.
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Gross
over-dependence on foreign labor caused by past underpricing
state services for that labor and overvaluing and protecting
Saudi labor.
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A
slow rate of reform in opening up and encouraging the private
sector.
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Underfunding
of infrastructure growth, including electricity, water, and
sewers, during the years of budget deficits in the 1990s.
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A
similar underfunding of education and medical services during
that period.
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A
past failure to create a Saudi work ethic, coupled to education
by rote learning that fails to prepare young Saudis for the work
force.
The
Role of King Abdullah and Saudi Reform
All
that said, anyone familiar with the role Crown Prince Abdullah has
played since the mid-1990s, is also familiar with the fact that he
has raised every one of these issues and has stressed the need for
economic diversification, Saudisation of the work force, expanding
the private sector, more foreign investment, etc.
He
has also been a leader in opposing favoritism and corruption, and
has sharply cut back on the government payments to members of the
royal family and other traditional recipients of government
largesse.
Any
one who bothers to read the Saudi Five Year Plan, Saudi budget, and
reporting of the Saudi Monetary Agency is also aware that real money
is going into structural economic reform, to job creation, and to
correcting the past underfunding of infrastructure, education, and
medical services.
There
is no doubt that the Kingdom needs to do more in political reform,
but economic reform is at least as important and probably has more
real-world priority for most Saudis. These are areas where Saudi
Arabia has already taken important steps. In fact, Saudi Arabia has
one of the most aggressive economic reform efforts of any country in
the Middle East. It is certainly imperfect and slow moving, but it
is also very real.
Near-Term
Economic Issues
It
is also important to note that this discussion focuses on
longer-term problems and not on the immediate situation. Saudi
disguised unemployment may not be efficient, but it does create jobs
and income flow for young men. Many Saudi families also have
substantial capital holdings inside and outside Saudi Arabia. There
are no reliable estimates of such holdings, but past US Treasury
studies put them well above several hundred billion dollars. (In
fact, so much private money is outside Saudi Arabia and other Gulf
states that it is impossible to halt private funding of extremists
groups.)
The
Kingdom is also experiencing a broad economic boom. Saudi oil export
revenues sank to only $34.3 billion in 1998, but they rose to $46.8
billion in 1999, $81.7 billion in 2000, $63.9 billion in 2001, $65.5
billion in 2002, $86.1 billion in 2003, $106 billion in 2004, and
will probably reach $157 billion in 2005. (See SAMBA, "The
Saudi Economy in Mid-2005, August 2005, www.samba.com)
Distribution
of income is a problem - as it is throughout the world - but Samba
reports that the Saudi nominal GDP has risen from only $546.6
billion in 1998 (a year with very low oil revenues) to an estimated
$1,185 trillion in 2005. This is more than twice the 1998 figure.
After
years of budget deficits, Saudi Arabia is now experiencing a major
surplus. The budget has gone from an 8.9% deficit in 1998 to a 16.1%
surplus in 2005. Moreover, official foreign assets have increased
from $69.4 billion to $177.5 billion, and government debt has
dropped from 119% of GDP to 51%.
The
end result has been a major increase in government investment in all
of the areas where underfunding was common in the 1990s. It has also
been a massive increase in per capita income. It was $7,437 in 1998,
but rose to $8,016 in 1999, $9,161 in 2000, $8,682 in 2001, $8,728
in 2002, $9,604 in 2003, $11,052 in 2004, and will probably reach
$13,603 in 2005. These figures do not approach the peak reached in
1980, but this was a freak year driven by the fall of the Shah and
Iran-Iraq War. In terms of real annual average per capita income,
Saudi Arabia is doing well.
In
fact, some aspects of the Saudi economy are doing so well that they
may actually be dangerously overheating. The Saudi stock market
generally increases in value by about 4-7% a year. A combination of
repatriation of capital after 9/11, high oil revenue, major growth
in the private sector, etc. led the TASI index to go up by 76% in
2003 and 85% in 2004 - an increase that makes the US IT boom look
modest. This increase is sometimes based on a vast overvaluing of
bubble stocks, although the problem is far smaller in Saudi Arabia
than in places like the UAE.
Much
of Saudi investment is also in productive areas like government
spending on infrastructure and human services, mining and petroleum
related industries, and in privatized Saudi companies in areas like
petrochemicals. One key result is that Saudi Arabia has the money to
pay for "guns," "butter," and "oil."
It can fully fund its counterterrorism campaign without imposing a
strain on the civil economy and can fully fund ARAMCO's efforts to
maintain Saudi oil production capacity, and expand it to 12.3 MMBD.
This was not possible during the period of low oil prices in the
late 1990s.
It
is also important to note that investment rates are high even in
lean years. As SAMBA notes, Saudi Arabia has averaged an annual rate
of 18.4% of GDP since 1990. A large amount of this investment has
also gone to human services and to productive areas like ARAMCO. A
major amount has gone to business since 2004, after six years of
negligible growth in foreign lending.
The
"Slack" in the Saudi Economy
Finally,
it is important to note that Saudi Arabia has a great deal of slack
in its economy that is not present in most foreign economies, and
that there are a number of important steps it can take to deal with
any major dip in oil revenues, and to ease the mid and long term
pressures on its economy.
These
include:
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Following
up on the steps King Abdullah took while he was Crown Prince and
totally eliminating subsidies to "do nothing" members
of the Royal family and "loyal families" that have
been rewarded since the days of the Ihkwan.
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Taxing
middle class and wealthy families at moderate rates.
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Taxing
luxuries and non-productive service industries.
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Eliminating
all government aid and subsidies to agriculture - none of which
currently serve any meaningful economic and strategic purpose.
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Introducing
true market prices for water, electricity, gas, and petrol for
all of industry and all but Saudi Arabia's poor. This will
sharply reduce the cost of infrastructure services and the
growth in demand.
-
Sharply
reducing labor permits for foreign labor, and removing the de
facto state subsidy of vast numbers of foreign servants. Create
a labor market based on hiring Saudis, not foreigners. Many of
the 6.14 million foreigners in the Saudi 2004 census were
foreign workers, and an extremely large percentage of the 1.93
million foreign women are menials or maids. Most of the develop
world now lives without a servant class; so can Saudis.
-
Accelerating
the "basket" of economic reforms the Kingdom already
has underway.
It
is all too easy to focus on Saudi Arabia's very real economic
problems, and ignore the fact that it has as yet done little to
impose the kind of solutions imposed by virtually every other
government.
Summing
Up
Like
every nation in the world, Saudi Arabia faces major economic
challenges. Part of its current success is also a matter of luck.
High oil prices may still become moderate or low oil prices in the
future. Trees do not grow to the sky and every economy goes through
cycles -- particularly economies so dependent on a single major
export or commodity.
It is not accurate, however, to argue that Saudi Arabia is somehow
now poor, faces critical immediate economic challenges of the kind
it did during a major dip in oil prices, or is failing to make
progress in reform because it focuses more on economic reform than
adopting Western political models.
The real economic challenge for King Abdullah is to press ahead with
the reforms the Kingdom has already begun, accelerate them, and
sustain them over time. If Saudi oil revenues remain moderate to
high -- a projection that has just been made by the Department of
Energy in the International Energy Outlook it issued on July 29,
2005 -- Saudi Arabia will not only sustain its present economic
boom, it will have the resources and time to address the medium to
long term structural problems that could have a critical effect on
stability. These problems will only reach the crisis point if
the government ignores them, and does not press ahead in reform.
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Anthony H.
Cordesman holds the Arleigh A Burke Chair in Strategy at the CSIS.
He and Nawaf Obaid have written Saudi Security: Military and
Internal Security Developments, which will be published by the CSIS
and Praeger this fall.
