Saudi Arabia’s big gamble

In the early 1970s, Saudi Arabia had a population of 5.6 million and the nation’s literacy rate was 15%. The situation changed over time as the governmentSA 3 invested hundreds of billions of dollars in modernizing and improving infrastructure, health care, educational systems and nearly every other physical aspect of Saudi life. Today, Saudi Arabia, which is one-fifth the size of the U.S. and mostly sandy desert, has a population of over 27 million and is 95% literate. Riyadh, the capital, has grown into a city of over 6 million. The country is oil rich, it contains around 16% of the world’s proven petroleum reserves and Saudi Arabia is the planet’s largest exporter of petroleum.

In 2015, King Salman ascended to the throne. His son, Deputy Crown Prince Muhammad bin Salman, is 30 years old and second in line to become king. The energetic prince, known by his initials MBS at home and abroad, has proposed a set of sweeping reforms. He is planning to drastically change Saudi society byMBH expanding the private sector and diversifying the economy away from oil. The oil company, Saudi Aramco, and other state owned enterprises in the communications sector, power generation and the national airline would be privatized. A media city would be created to entertain the young, the power of the religious police curtailed and at some point, women would be allowed to drive.

The prince has a staff filled with PhD holders from Western universities. His reform blueprint “Vision 2030” lists 178 strategic objectives that can be measured by 371 performance indicators. Government ministries will have to undertake 543 initiatives to implement the plan. Under Vision 2030, non-oil revenue is to more than triple by 2020. Saudi Aramco, the national oil company, is valued around $3 trillion, a five percent privatization share could easily cost around $100 billion. Saudi Arabia is home to two of Islam’s holiest shrines in Mecca and Medina. MBS wants to increase foreign visits to the holy sites, he would like to see the tourism rate increase to 45 million annual visitors in five years.

The goal of Vision 2030 is to remake Saudi Arabia into a more dynamic country. The prince wants to harness the power of the markets, shed do-nothing public sector workers, and abolish the subsidies that many Saudis have come to see as a right. The push to privatization is designed to shake up the country’s welfare-state mentality. Saudi Arabia has a labor force of 11.6 million, more than 80% of the workers are non-Saudi. The country is dogged by a 30% youth unemployment rate, young Saudis are said to lack skills and a work ethic.

Prince Muhammad has a big job ahead of him because Saudi Arabia has been often criticized for being complacent in economic matters. Can the pampered SA 1Saudis be trained to work for a living? Over the years, the people have developed a strong sense of entitlement. The projected government deficit of $87 billion in 2016 has led to a partial reduction in the subsidies for gasoline, electricity and water. Due to low world oil prices, the country’s cash reserves could be used up in five years if spending is not curtailed. Foreign exchange reserves have fallen to $650 billion.

Saudi Arabia needs to create around 226,000 new jobs per year, in 2015 it created about 49,000. For his reform plans to succeed, Prince Muhammad has to be able to alter the longstanding arrangement between the monarchy and population. The inflated government salaries, free health care, free education and cash transfers have produced a high spending consumer society that relies on continual government infusions of cash.

Saudi Arabia is an absolute monarchy that implements sharia law. The country’s main religion, Wahhabi Islam, is an austere form of Sunni Islam that limits theSA 2 role of women. MBS and his staff are operating in a conservative society that has always been somewhat resistant to change. The prince will have to make adjustments to the long standing pact between the Saudi monarchy and the religious establishment. Perhaps he will be able to inject a dose of liberalization into the mix, currently the percent of females in the labor force is only 18%.

As subsidies are reduced, Prince Muhammad will have to allay the suspicions of jaded commoners since royal family expenses are handled as state expenses and the royal component of the country’s budget is a state secret. There are also many pessimists because reform has often been talked about, but never implemented. The activity of MBS has already raised the anxiety level, conservatives think he trying to do too much too quickly. There is a certain amount of danger ingrained in the attempt to bring about major economic change. If the prince’s reform effort goes badly, it could throw the country into chaos. That would not be good news for the world’s oil importing nations.

3 responses to “Saudi Arabia’s big gamble

  1. Karen McClelland

    Interesting post. Hope it is a good sign for the future. Economic opportunity for all results in social change that will be incompatible with fundamentalist Wahabi Islam , interesting to see if Crown Price or religious fundamentalism wins

  2. I have read that Saudi Arabia, out of necessity, is beginning to invest heavily in the development of solar power., something Arizona politicians and public utilities should emulate. According to an article in The Atlantic about this, “The Saudis burn about a quarter of the oil they produce—and their domestic consumption has been rising at an alarming 7 percent a year, nearly three times the rate of population growth. According to a widely read December 2011 report by Chatham House, a British think tank, if this trend continues, domestic consumption could eat into Saudi oil exports by 2021 and render the kingdom a net oil importer by 2038.” See http://www.theatlantic.com/magazine/archive/2015/07/saudis-solar-energy/395315/

    • For Sure Not Tom

      We’ve been funding terrorism through our gas tanks for decades.

      Mike Morgan is correct about solar. The Saudi’s don’t want to get so high on their own supply that they have nothing left to sell.

      And we should do the same because it makes good economic sense.

      From CNN/Money………..

      “The number of solar jobs in the U.S. has more than doubled in five years. In fact, there are more people working in solar now than at oil rigs and in gas fields.”

      http://money.cnn.com/2016/01/12/news/economy/solar-energy-job-growth-us-economy/index.html

      Saudi Arabia, China, Europe, all are making big investments in solar. Germany has more solar power than it can use on some days.

      Our state politicians and governor are working to block solar expansion in Arizona, causing job losses, keeping Arizona in the last century, and leaving us vulnerable to price manipulation by oil producing countries like Saudi Arabia.