A glimpse into the Saudi economy

Today's Financial Times offers a fascinating glimpse into the Saudi economy, based on information in an IMF report. Given the language of the article this is not likely to be a public document, and as there is very little known about the true state of the Saudi economy, this makes for fascinating reading. It contains many interests nuggets of information. For instance, expatriate workers make up 48% of all manpower in Saudi Arabia, which shows how dependent the country is on foreign workers. In David Pryce-Jones's excellent book The Closed Circle there is more information on the Saudi economy's reliance on foreign workers. It was written in the late 1980's with a first publication in 1989, so the information there is possibly outdated, but the key features will not have changed much. Writing about foreign workers:

Forty thousand American and 30,000 British expatriates in Saudi Arabia perform the vital services which actually enable the country to function and modernize. Technical tasks, and of course laboring in all forms, demeaningly connote low status and therefore shame. [...] In these Gulf states, 60 percent of the labor force is estimated to consist of immigrants, and in Saudi Arabia perhaps as much as 80 percent."

The FT's 48% refers to "manpower," rather than labor force, so there could be a difference in the definitions. It is also unclear whether Saudi women are counted as part of "manpower." The structure of foreign workers straddles the top and the bottom of the value-added chain: de facto slave labor for menial tasks, and high value-added technical staff to run the oil fields and machinery. Both kinds of work are held in low regard, being beneath the dignity of Saudis. This means that they look down on the very people making their oil wealth possible. Quoting Pryce-Jones again:

The assumption remains constant that oil wealth brings no particular responsibility to understand the Western forces and sciences which generated it. As J. B. Kelly summarizes, "the Saudi Arab is convinced of the superiority of his own culture over that of the West and of the industrial world in general. He believes that he can acquire and use whatever the West has to offer in the way of material goods and technological methods, and at the same time reject the culture which produced them. It is, quite literally, incomprehensible to him that the products and skills of the West are inseparable, in their genesis and development, from the West's empirical and scientific traditions."

The dependence on Western knowledge and expertise is enormous. And as the quote above indicate, it's not a matter of tardy development, but it is the denial of the need for development that causes this.

So what do Saudis to then? They're mostly employed in what they consider to be honorable pursuits, the wheeling and dealing, the bestowing of favors in the form of contracts, and generally being unproductive. A massive disintermediation of the Saudi economy would render most of them useless. In the 1970's, this worked to an extent: the number of petrodollars per capita was gigantic, allowing the ruling Saud family to cream off enormous riches while still spreading great wealth in the country. Population growth is making this untenable though, and it has already pushed unemployment up to 10%. Quoting from the FT article:

With a budget that is dominated by wages and debt service payments, the government has little room to manoeuvre when oil prices drop. Economic growth, meanwhile, is not keeping up with the population increase of about 3.5 per cent a year. Real GDP growth, according to the Fund, was a mere 1.2 per cent last year and is projected at only 0.7 per cent this year.

Right now, per capita GDP in Saudi Arabia is declining, and that is with oil at almost $30 a barrel (although the data might refer to earlier years in which the average price of oil was lower). The economy simply does not have the structure necessary to spark endogenous growth. There is no entrepreneurship, no risk taking, no start-ups, only the stultifying patronage-based system of favors. Government debt is now 95% of GDP, meaning that servicing this debt is becoming a burden. Only a few European countries have debt levels that high (Italy and Belgium), while most of the industrialized world has government debt in the order of 30-60%. The budget deficit in Saudi Arabia is now said to be 4.5% of GDP, which means it is still growing the mountain of debt.

The FT also says that oil export receipts for 2000 amounted to $72 billion, while the government reported oil receipts of $57 billion in the budget. The missing $15 billion is channeled to the state oil agency, Saudi Aramco, and of course the ruling Saud family, which uses it to fund the estimated 7,000 members of the royal family. The King's summer vacation alone costs $150 million, or about 0.2% of Saudi Arabia's oil revenues. To put this into context, the planned increase in the US defense budget for 2003 is $48 billion, or about two-thirds of Saudi oil revenues.

In all, the report paints a rather bleak picture of the Saudi economy. Even with high oil prices, it is in danger of spiraling out of control. The rapidly rising population, coupled with the disdain for Western culture means that the there is not going to be an easy way out. Measures can be taken in the short term to stabilize the situation, such as introducing an income tax (although not on Saudis as that is too sensitive politically) and privatizing some state companies. Yet without establishing a structure that can generate domestically-driven economic growth and development, the Saudi economy is doomed. But establishing these strutures means adopting Western culture and repudiating the cultural identity that the Saudis have built. Saudi Arabia now has the choice of either coming to terms with the modern world, or clinging to a medieval system that will in the end destroy itself.

It also shows that the "oil weapon" is no longer a threat. Saudi Arabia needs the revenue too much. They can't risk cutting off their revenue stream. And once Iraq has been liberated, the situation for the Saudis will become even more problematic. Interesting times ahead in Arabia.