The Political Economy of Saudi Arabia

Tim Niblock, Monica Malik

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134088935
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

With Saudi Arabia being of immense importance both politically and economically in the Middle East, this book provides a much needed, broad ranging survey of the development of the Saudi economy from the 1960s to the present day.

Written by a highly reputable author, the book includes an analysis of how political and social factors have shaped policy, and how the Saudi state is coping with the dynamics of a rapidly changing economic and political situation.

1 Introduction

1.1 Perspective

The objective of this book is to provide an understanding of the problems facing Saudi Arabia’s economic development today, and to assess the success of the government in creating an economy which will satisfy the long-term needs of the Saudi population. The stress on ‘longterm needs’ is important. For states which benefit from substantial oil revenues, and a relatively small population, it may be easy to meet the immediate needs of the population. Revenues can be used to provide the services, subsidised provisions and employment which the population requires. Ultimately, however, the economy will need to survive without oil revenues, and must be geared to operate on a non-oil basis. At current rates of production, Saudi oil would last some 75 years. With the depletion of oil reserves in other parts of the world, however, the pressure on Saudi Arabia to increase its rate of production will increase–and thereby shorten the life-span of the oil resources. Conversely, there is the possibility that technological developments in the energy field may reduce global dependence on oil, lessening global demand for oil. In this case the oil revenues would last longer but perhaps not be so substantial. Whichever scenario is borne out in reality, the long-term needs of the population should not be dependent on the continued inflow of oil revenues. Saudi Arabia, moreover, has one of the highest rates of population increase in the world, so meeting the needs of the population will become steadily more expensive.

There may also be less tangible reasons for seeking to establish a sound non-hydrocarbon base to the economy. A population which lives on the proceeds of the extraction of its natural resources, with only a very small part of the population employed in the production process, will not be at ease in the international community. Living in a cocoon created by apparently unearned income, divorced from the problems facing other peoples, sets a population apart from the global community–creating attitudes and mentalities out of touch with international realities. A national society living off rent is no less uncomfortable a proposition than a class living off rent in the domestic setting. The Saudi population both deserves and needs to be dynamically engaged with developments in the wider world.

Assessing the economy’s ability to survive without oil, at a time when oil revenues continue to underpin and shape almost every facet of economic activity, is not easy. By the time oil revenues have run out, the structure and attributes of the global economy will be substantially different from what they are today. How can one, then, assess whether current economic policies in Saudi Arabia will be suited to coping with a distant future, whose needs and requirements are difficult to predict? The approach taken here relies on two different strategies. The first is to identify the criteria of success: the dimensions of economic growth and development which provide a basis for economic vitality whether oil is present or not. The second is to identify the structural characteristics which underlie economic policy-making: the socio-economic and political factors which have shaped, and will continue to shape, economic policy and development. An understanding of the dynamics affecting policy and development should provide a basis on which to project likely future developments.

Four criteria of success are used in this work. The first is whether the state has been able to create the social and physical infrastructure which economies need if they are to operate effectively and competitively in the global market. The need for social and physical infrastructure is, of course, not static: the requirements change with the growth of population and the development of the economy. The criterion, therefore, must relate to whether the infrastructure which is being laid down is appropriate to the country’s stage of development, and whether its quality (especially in educational provision) is suited to future expansion and refinement.

The second criterion is whether the sectors in which Saudi Arabia has the most significant comparative advantage are being developed effectively. Clearly this refers in part to the production and export of oil, gas and refined petroleum products, despite the need to reduce dependence on this resource. Advantage needs to be taken of the existing rich reserves so as to fund investments in the wider economy. The development of the petrochemicals industry and of associated downstream industries, and industries dependent on easily accessible and cheaply priced energy, however, also constitutes a crucial component of Saudi Arabia’s potential comparative advantage. These industries, moreover, are mostly dependent on natural gas rather than oil. Saudi Arabia’s gas supplies are currently expected to last for more than a hundred years at existing rates of production (with only 15 per cent of the country currently having been explored for natural gas) (US–Saudi Business Council 2005: 5).

The third criterion is whether the economy is providing employment opportunities to the population–of a kind which are both competitive with international labour rates, and appropriate to the levels of qualifications and training available in the Saudi population. The ability of an economy to provide adequate employment for its citizens is always crucial, but the dynamics of the global economy today give an added dimension to this issue. The process of economic globalisation, and the requirements of the World Trade Organisation (of which Saudi Arabia became a member in December 2005), mean that labour must be internationally competitive. In an open economy, of the kind envisaged and required by the WTO, investment will be attracted to those countries where goods and services can be produced cheaply and efficiently. The reduction of protective tariffs, and the removal of other measures which inhibit trade, will open the Saudi economy up to international competition in the same way as all other economies. While investment may be naturally attracted to those fields in which Saudi Arabia enjoys a comparative advantage, investment and production in other fields will move away from Saudi Arabia unless labour is internationally competitive (in costs and productivity).

Labour competitivity poses a particular problem in Saudi Arabia. Saudi governments in the past two decades have sought, no doubt justifiably, to reduce reliance on foreign labour (skilled, unskilled and professional). The impact of these measures has been to raise overall labour costs and reduce labour productivity. At most levels, Saudis benefit from better wages and working conditions than foreign labour. It is the latter, however, whose rewards and productivity reflect most accurately the rates available on the global labour market. The intention to reduce foreign labour while promoting economic production geared to the global market, then, requires one of two possible strategies. Either the remuneration and conditions of Saudi labour have to be reduced to the same level as that of foreign labour; or else the skills of Saudis (and therefore their productivity) have to be raised to exceed that which foreign labour could provide. Neither option is easy to achieve, politically, socially or humanly.

The fourth criterion is whether the private sector is sufficiently strong and effective to compete in the global market, without significant dependence on tariff protection, special favours or subsidies. This criterion is clearly linked in part to the third criterion, given that labour constitutes an important–if not the most important–cost for most private-sector businesses. Other factors, however, are also relevant, such as whether the relationship with the government bureaucracy enables the private sector to operate efficiently and flexibly. The level of managerial skill is a further important consideration. The strength and vitality of the private sector provides some indication of how well the economy could survive without oil. An enterprising private sector will have no difficulty in adapting to the changes wrought by declining oil revenues.

There is an argument for including a fifth criterion: whether a reasonable portion of oil revenues is being put aside as a ‘fund for future generations’. The latter would be composed of a mixture of different foreign assets, and would provide income to the country when oil revenues are declining. Such assets would be ring-fenced against expenditure in the short term. Reference will indeed be made to the levels of foreign asset holdings, but it is difficult to use this as a measure of economic success. Some would say that current resources are better employed in building up infrastructure and existing economic capacity, and that the hoarding of money from oil revenues should be left to a later stage.

The second strategy used in this book to assess the ability of the Saudi economy to survive without oil is to examine the dynamics which underlie the pattern of development. The intention here is to identify the parameters which will shape economic growth in the future. Three theoretical approaches are used to uncover these parameters. The first focuses on the depth to which states intervene in economies. It is clearly important to identify whether the state sees itself simply as an arbitrator between different social interests, or as a major participant in economic production. The second looks at the relationship between the state and society. Of central concern here is the degree to which the state is autonomous of social groupings. Are state policies shaped by the economic interests of social groupings which are allied to the state, and on which the state is dependent? Is the state bureaucracy able to take decisions which are rationally geared towards the effective development of the economy, as opposed to simply benefiting those who are in power? The third examines the extent to which a state’s dependence on externally generated ‘rent’ (oil revenues in the case of Saudi Arabia) determines the character of its social, economic and political structures, shaping and constraining the policies which can be pursued.

These different approaches are covered in turn in the section which follows.

1.2 Theory and Saudi political economy: useful approaches

The three different theoretical approaches which will be used here, as mentioned previously, cover the depth of state involvement, the quality and character of that involvement, and the impact of oil revenues. This section will elaborate on these approaches. The comparative and theoretical perspective is important. Patterns of development in other countries can throw light on why Saudi economic development has taken the path it has, and how it may evolve in the future. The remainder of the book makes use of these theoretical insights, showing how the changing patterns of state involvement, and the impact of oil revenues, have shaped the country’s political economy. Transitions between the various stages of Saudi Arabia’s economic development are interpreted in terms of the impact of, and relationship between, these factors over the period in question.

1.2.1 The depth of state involvement

The starting point for considering differing levels of state intervention in the economy is the recognition that some state action in society and economy is a necessity. Where states have collapsed, economic development or growth is not viable.¹ For example, in Somalia the state collapse occurred over a long period between 1969 and 1991. The resulting situation was a country with destroyed physical infrastructure and economic assets, private business looted, and pastoral production reduced (World Bank 1997: 159). There is a need for the state.

The issue, therefore, is what level of state involvement is present, and how this is embodied in state policy. By classifying different levels of state involvement, it becomes possible to specify where the Saudi case fits into the spectrum, and to assess whether that place in the spectrum has changed over time. Three characteristically different levels of state involvement in mixed economies will be identified here: the minimal state, state-aided capitalism and state-sponsored capitalism. The first two are in line with development led by the private sector, while state-sponsored capitalism is where the state is the main agent of growth. All three are ideal types, as in practice states do not fit neatly into such categories.

The minimal state

The role of the state in this model is purveyed as providing maximum possible freedom for citizens. It would be difficult to point today to any state which approximates to the minimal state. The notion of minimal state implies that the functions of the state should be restricted to those it alone can perform, or can carry out more efficiently than the private sector. For the state to be ‘minimal’ it should not:

• be concerned with, or interfere in, individuals’ private lives;
• intervene in the economy, which is based on free market principles;
• involve itself in the provision of opportunities or promote equality;
• plan in detail; or
• take action intended to redistribute resources (Evans 1991: 2–3).

The philosophical underpinning to this approach lies in the view, put forward for example by Nozick, that the poor are better off in a private property/free market society than under any other system. The contention is that in such a society the economy will grow quickly and wealth will trickle down from the rich to the poor. It is also maintained, however, that the fabric of society is damaged by state interference, which violates the rights of individuals (Plant 1991: 132).

The areas the state should be involved in include:

• defence, military provision and foreign relations;
• internal law and order against illegitimate force, threats to property, theft, fraud and the violation of contracts.

The model, therefore, simultaneously emphasises some aspects of state power (e.g. the need for law and order), whilst restricting the scope of the state’s action and the extent of its resource base. In practice, the proponents of the minimal state confront a dilemma. The operation of an effective market, to which they attach such vital importance, often requires a relatively strong state to provide the necessary security, ensure free competition and give investors confidence. Far from the state inevitably threatening the coherence of the market, therefore, the latter requires a strong and effective state.

State-aided capitalism

This can be defined as an economic order where the state plays a significant yet carefully circumscribed role in the economy. The appropriate role of the state is to ‘to support and facilitate, rather than to manage or directly participate in, the productive sectors of the economy’ (Koch-Weser 1996: 49). The state, then, retains an ideological commitment to economic development through free market capitalism, but the role of government is considered of critical importance to the proper functioning of the private-sector economy. The government provides the framework to ensure free markets, to offset distortions and to provide functions that the market would not provide on its own. In some cases, it may need to create regulatory systems to address systemic and monopoly risk. Under state-aided capitalism the government only invests in activities which have the characteristics of ‘public goods’, and even in this sphere some of the activities may be contracted to the private sector so as to increase efficiency (World Bank 1995: 11). In the words of Meier:

…the private sector…is the engine of growth. The role of the public sector is seen as the creation of a favourable enabling environment for economic activity. The enabling environment consists of legal, institutional, and policy frameworks within which economic agents operate.

(Meier 1995: 525)

The economy-related functions of the state under state-aided capitalism would normally include the following:²

• an appropriate legal system covering the elements needed for a capitalist framework, e.g. property law,³ company law, and contract and patent law;⁴
• the maintenance of macro-economic stability, i.e. intervention in, or action through direction ownership of, the banking system, with a view to guaranteeing the value of money and a measure of price stability;
• action to offset or eliminate price distortions, e.g. through antitrust regulation to break up or to check monopolies;
• provision of physical infrastructure, so as to ensure that businesses can utilise an appropriate network for trade and communications; and
• provision of social infrastructure, such as education, health and environmental protection (Wade 1990: 11–12).

To varying degrees, governments operating under this model may also take action to ensure an adequate quality of labour in the economy through the provision of specialist training (World Bank 1997: 52; Meier 1995: 529); redistribute income to the poorest (if only to ensure that discontent does not threaten the capitalist system); provide some protection for the environment for long-term well-being; and offer some general services for business such as basic research, credit access for small companies and market information.

Most economies in the Western world fit into the model of state-aided capitalism. How governments interpret and apply the different elements outlined above, however, can vary considerably.

State-sponsored capitalism

Under this model, the state acts as the primary engine of growth, acting positively to promote rapid industrialisation. The latter requires a high level of productive investment, directed towards carefully selected sectors of the global economy–those which the state deems to provide opportunities for substantial export-oriented industrial growth. The primary commitment of the state, then, is to development and not to the maintenance of a free market per se. A good and supportive relationship with the private sector and the capitalist class in general is needed as a means to the ends sought by the government. As Wade has noted, the government’s intervention in the market may even include distorting prices so as to change the way in which the private sector behaves, or using non-price methods to alter the behaviour of market agents. The state thus promotes investment in key industries, while at the same time ensuring that these industries are technologically advanced and internationally competitive (Wade 1990: 334; 1990a: 328).

States which follow this developmental strategy tend, at least in the initial stages of industrialisation, to be ‘hard’ or ‘soft’ authoritarian states. Corporatist relations with the private sector are maintained, with key business interests closely integrated into governmental policies and policymaking. It is deemed necessary to suppress pressures from below while the developmental impetus is built up. A frequently cited case of statesponsored capitalism is that of Taiwan. In the post-war era, Taiwan saw rapid economic growth: real GDP grew by 10.6 per cent a year from 1965 to 1979 (Wade 1987: 30). Wade has noted that a major feature of Taiwan’s development was its ‘industrial deepening’ (Wade 1990a: 236). The role of the state was central to industrial development: often the industries that developed were not the product of international comparative advantage, but stemmed from government policies aimed at creating ‘winners’ and leading industries. Among the policies which the government used to promote this strategy were the following:

• Land reform, providing a labour force for industry and enabling the extraction of a surplus from the countryside for investment in industry. This also allowed the agricultural sector to produce enough for domestic consumption and export, such that foreign exchange was available for securing inputs for manufacturing.
• Management of prices so as to enhance industrialists’ profits and encourage more investment. Industrial wages were kept low, in part through curtailing union power. Concessional credits were provided so as to lower costs of production and drive investment first to heavy industry and then to electronics and machinery production.
• Creation of major state enterprises (the largest in the non-communist world). In the 1950s the state established new industries in the refining, processing and manufacture of fuel, chemicals, metals, textiles, fertilisers, glass, plastic and cement. In 1952, 56 per cent of industrial production was in public corporations (Amsden 1979: 367). By the 1980s the share of public enterprises had fallen to under 25 per cent, and many foreign firms had entered the market, but the role of the state enterprises remained significant.
• State ownership of the banking system. Investment was controlled and channelled through the state-owned banks.
• Control of foreign competition. Rather than having a blanket policy, the protectionism was very selective and geared towards particular sectors. Between 1957 and 1976 the percentage of products with import control remained almost the same, at 36 per cent and 41 per cent respectively. Export orientation, therefore, was not achieved by free markets. There was also an emphasis on large-scale plants to obtain economies of scale as a basis for international competitivity.
• Promotion of exports. Subsidies were provided for certain types of exports, and companies exporting such products were allowed to import inputs without restrictions.
• Promotion of technology acquisition from transnational corporations. Such technology was then used to develop a national technology system. Foreign investment was directed into fields which fostered technology linkages (Schive and Maumdar 1986, cited in Wade 1990: 304).

This pattern of state-sponsored capitalism has been followed by a number of other East Asian and South-Eas...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Tables and Charts
• Preface
• Abbreviations
• 1 Introduction
• 2 Laying the Basis for Development, 1962–70
• 3 Planning for Transformation, 1970–85
• 4 Constrained Development, 1985–2000
• 5 Attitudes of the Business Elite, 1970–2000
• 6 Planning for Reform, 2000–6
• 7 The Record of Reform
• Glossary
• Notes
• Bibliography