JEAN-FRANÇOIS SEZNEC — As Saudi Arabia develops new strategies for economic development, its traditional governance model may disappear.
While the private sectors in Arab Gulf countries have developed since the region’s first oil boom, much of these rentier states’ activities represent increasingly sophisticated rent recycling rather than autonomous economic diversification. Critically, government interests often contrast those of Gulf nationals, who enjoy few employment or investment opportunities in private enterprise. Do business and social entities face a zero-sum conflict in terms of state resources?
The interpretation presented here may not be entirely accurate. There is so much capital available — particularly in Saudi Arabia, the United Arab Emirates (UAE), and Qatar — that the private sectors there are able to operate with large degrees of autonomy. Given the immense wealth, there is simply not a very strong competition for resources between private and public spheres. The private sector in most Arab Gulf countries today uses the stock market to fund their companies. The state has an advantage in terms of its access to very large amounts of capital. The big government-owned firms in the Gulf — for example, Sabic or some subsidiaries of Saudi Aramco — can thus raise funds on the stock market as well as from state entities.
The private sector is certainly not of the same size as these state-run companies, but it also does not compete with them. In Saudi Arabia, private entities as well as State companies have access to the country’s Saudi Industrial Development Fund, which lends at 50 percent of any project, with no interest for 15 years. It is important to remember that the various states in the Arab Gulf have built immense wealth over the past few decades, thus allowing them to grow much faster than any entity in the private sector. This does not mean that one has shut out the other.
Ultimately, the kind of rentier state that has existed in Saudi Arabia and other Gulf countries may, today, be disappearing. For example, the entire notion that the Saudi people are dependent on their state for rent is reversing. In the future, the Saudi state may become dependent on its people. To this end, Riyadh has introduced new taxes — including a value added tax (VAT) — and has cut subsidies across the country; in 2015 the government announced that it would cut government spending by 14 percent. More recently, it declared its plan to privatize parts of the state-owned oil company, Saudi Aramco, thus ensuring that the company would pay taxes to the state. These developments indicate that the entire structure of Saudi Arabia’s economy may be changing.
Although wealthy, business elites in the Gulf have seemingly refrained from exerting influence on governance, or have provided limited support to embattled regimes. How do governments within the Gulf Cooperation Council (GCC) reinforce the structural isolation of regional business — are Gulf capitalists impotent in the political arena?
The relationship between state and public spheres is slightly more complex than it seems in terms of political affairs. Although they are wealthy, business elites in the Gulf have refrained from exerting influence on governance, or at best have provided limited support to embattled regimes. These figures know that they will not receive the most lucrative oil or construction contracts if they attempt to meddle in the state’s operations.
Gulf capitalists, however, are not powerless in the political arena. They are good lobbyists. When it comes to their business interests, they are very good at nudging government officials toward a desired outcome. Their lobbying abilities are so effective, in fact, that the Chambers of Commerce in many Arab Gulf countries have become real thorns in the side of state leadership.
This situation is best exhibited in Saudi Arabia, where there are three primary competing sources of power. Most importantly, the royal family and the civil service — which controls companies like Sabic and Saudi Aramco — compete for political capital, along with the merchants who manage private industrial and commercial ventures. The royal family, in many instances, arbitrates disputes between the former two groups — this role is an anchor for their political power. Most of the big development in Saudi Arabia thus comes not from the royal family, but from plans drafted either by the civil service or merchant class.
The recent drop in oil prices has prompted concern within GCC governments regarding future economic stability. Can GCC states realistically transform their economic systems within the current political environment?
The Saudi government is currently attempting to empower the country’s youth. This goal is clearly manifest in the royal family’s economic development strategy. This plan will take political and economic power away from the royal family through, for example, the privatization of Saudi Aramco. The McKinsey report specifically advocated for improved efficiency in terms of how the Saudi population is mobilized and employed: it seeks to find ways to increase the productivity of people. The more productive Saudi Arabia’s work force becomes — through training in modern technology, machinery, and management methods — the fewer individuals will need to be employed to maintain the same standard of living in the country.
For example, any manual labor project — like the digging of a trench in Riyadh — would normally employ around 50 foreign nationals. If the state could encourage contractors to replace these 50 workers with three Saudi nationals who were trained to use the latest trench-digging machinery, it will be possible to perform the same kinds of projects at a drastically reduced cost. Essentially, these kind of jobs, which require more knowledge, training, and experience, could go to citizens of Saudi Arabia: this is the core policy recommendation in the McKinsey report.
What are the political implications of the new set of economic policies that Riyadh is attempting to implement? Saudi Arabia is transforming its economy in several key ways: empowering the youth; increasing human efficiency; changing employment demographics as more women seek employment; and training a new generation of skilled workers to work at high salaries. Such a fundamental process will necessarily rankle some in the established echelons of Saudi power. For instance, the religious establishment will likely be unhappy to see an increase in the number of women employed in the workforce; it might also be concerned about greater freedom among Saudi youth to express themselves, resultant from higher wages and economic clout. Perhaps some Saudi merchants will be displeased that, as salaries and skill-levels rise, it will become more difficult to hire cheap foreign labor — slaves, essentially, from South Asia — instead of more demanding local labor. Finally, certain members of the royal family may worry that access to funds from state-owned companies will be cut off, following privatization.
None of these parties, however, has any real choice about whether economic development is implemented. Mohammad bin Salman, who is spearheading this program, is 30 years old, and represents a new vision of how the Saudi state should be run. The majority of citizens there support him, making it very difficult for anyone on the periphery to voice dissent. It is difficult to predict how these tensions will be manifest as the economic development program moves forward. Ultimately, Saudi Arabia has been thinking about how to diversify its economy since the 1970s. The real driver of this process has always been the country’s civil service. Today, these older, change-oriented individuals see in Mohammad bin Salman an energetic, young leader who has been empowered by the King to actualize change. All of the people who have wanted to modify the Saudi economic situation are now able to pursue their policies because the political power is aligned favorably. It is simply naive to think that Saudi Arabia’s economic future lies in the hands of one man.
Although Saudi Arabis is cash-rich following a decade of high oil revenue, its development strategies have thus far relied heavily on private industry for job creation and the construction of a “knowledge economy.” Can the private sector become the main force driving development in the country — how successful has the Saudi state been at mobilizing private industry to promote economic diversification?
At this point, the primary source of economic diversification across the GCC states is still the civil service and the large state-affiliated firms. The private sector can be pushed to hire more local citizens, but their impact is relatively small. Riyadh is moving forward on a plan to privatize parts of Saudi Aramco by floating 5 percent of its shares on the market. Over half of the population in Saudi Arabia owns shares on the country’s stock market, and this policy will increase their level of involvement and investment in the country’s economic future.
The private sector will likely take advantage of the products from state-led entities to develop their own businesses. Of course, the private sector is not a single, monolithic entity; it comprises many different types of enterprises. Large private businesses in Saudi Arabia have traditionally enjoyed incentives to pursue this type of growth. As the economy begins to grow faster, these businesses will benefit accordingly. It is important to note that the merchant families who own these entities do not really need too much assistance: they do very well on their own. It is critical, however, to see what support can be provided to small and medium sized enterprise (SME) — that is the sector where the most jobs will be created. There is very little regulation for these businesses. Today, Saudi SMEs are working with around 90 percent foreign labor, paying their workers the equivalent of around $400 per month. Saudi nationals cannot work for such low wages; that must change.
In Saudi Arabia, 27.8 percent of youth are unemployed. Some analysts have argued that this figure highlights complex structural problems in the Saudi economy. What are the main sources of youth unemployment facing Riyadh — how do stakeholders understand the challenge of youth unemployment?
Saudi youth unemployment is due almost exclusively to the low salaries paid to laborers across the country. If businesses were willing to pay their employees a living wage, youth would be willing to work. For example, the men who worked as truck drivers in the mid-to-late 1970s were nearly all Saudi nationals. Today, shipping companies pay $400 or $500 per month to hire foreign drivers: a young Saudi citizen simply cannot live on $5,000-$6,000 per year. The problem is not that the Saudi youth cannot work, or do not like to work: rather, they have no incentive to participate economically. It will be very difficult to change that economic structure without creating huge levels of inflation: that is the challenge with which Riyadh must grapple today.
Gulf rivalries — particularly between the Sunni GCC states and Shia Iran — have been cast as primarily sectarian. However, more tangible competitions over regional markets have proven equally divisive as ideological conflict in shaping tension. Although significant ideological differences exist, how can modern Gulf rivalries be understood through the lens of market competition?
There is no significant economic competition between Saudi Arabia and Iran. Saudi Arabia exports close to 9 million barrels of oil, Natural Gas Liquids (NGL), and products per day, whereas Iran can only manage 1.5-2 million barrels. Although the two countries are constantly posturing around this issue, there is no real contest. Riyadh views Tehran mainly through ideological and balance-of-power lenses. Iran is a large country of approximately 77 million people, compared to Saudi Arabia’s 29 million. Iran does have an advantage in natural gas production, which is sold on a completely different market than petroleum. The two countries could benefit a great deal economically if they traded these two commodities with each other. This is probably an impossible goal.
In his interview, David B. Roberts described an increasing willingness of key GCC states — primarily Saudi Arabia, the United Arab Emirates (UAE), and Qatar — to adopt adventurist foreign policies in response to concerns in places like Yemen and Libya. As leaders in Riyadh, Abu Dhabi, or Doha pursue aggressive international positions, how have their economic models evolved to incorporate new pressures, opportunities, and threats resultant from their regional strategy?
The economic models used by GCC states have not yet changed, even as foreign policy evolves. There is no link between these two spheres. The foreign policy practiced by the Arab Gulf countries is, in many respects, collectively aimed at eliminating the Iranian threat or influence from the region, particularly in Syria and Lebanon. The GCC states have not reached the point at which they realize that it is impossible to accomplish this goal — just as policymakers in Tehran have also failed to understand that they cannot eliminate their rivals in the Gulf.
Until recently, no Arab ruler within the GCC has paid serious attention to changing their country’s economic system . The softening of United States rhetoric toward Iran shocked many governments in the Gulf, particularly the Saudis. Traditionally, rulers there were able to manipulate Washington into holding the Saudi line against Tehran. Just as the Saudi economic structure may be moving away from the rentier model, so, too, is the country’s foreign policy adapting to become more independent from American influence or support.
A 2011 Institute of International Finance (IIF) report suggested a net gain from the Arab Spring for Gulf oil exporters, as the GCC’s GDP growth increased from 4.7 percent in 2010 to 6.5 percent the following year. After 2011, petroleum export funded a larger proportion of government spending than before the Arab Spring. To achieve social stability and reduce the public sector’s vulnerability to fluctuating oil prices, will Gulf countries need to undertake a more intensive process of institutional rather than economic change — how can GCC leaders structure this process?
During the unrest in 2011-2012, Gulf governments were able to use their large cash reserves to essentially achieve stability by paying their populations to keep out of the streets. In Saudi Arabia, King Abdullah ordered his monetary agency to disperse $100 billion among the Saudi people, to quiet any large-scale opposition.
However, the more important development in the economic model employed across the Gulf remains the dissolution of traditional rentier approaches to governance. The new generation of leaders among the GCC states — especially in Saudi Arabia, with Mohammad bin Nayef and Mohammad bin Salman, and in the UAE with Mohammad bin Zayed — realize that their economies are changing whether they like it or not. Leaders today are unable to simply pay their people to keep quiet — instead, it is crucial to give these people meaning to their activities. These states are certainly still paying their people a great deal of money, but the transition away from this model of economics or governance is — after the price of oil dropped — much faster than many observers realize.
The Arab Spring has, in many ways, been of no importance to the Gulf leaders. They have a very different vision of how to approach social, economic, and political transformation. Such a process will not occur according to a democratic model; it will instead rely on the empowerment of the populations’ economic clout, ultimately making the state dependent on its people.
JEAN-FRANÇOIS SEZNEC is a Nonresident Senior Fellow at the Atlantic Council’s Global Energy Center. He is also Managing Partner of the Lafayette Group LLC, a US-based private investment company, and an Adjunct Professor at Georgetown and Johns Hopkins Universities.