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Desert Mirage: Saudi Arabian Debt and Political Instability
by
Jamie Etheridge
November 27, 2002 Political Economy of the Middle East
Prof. Clement Henry
Introduction
One of the defining aspects of globalization has been a tightening of economic and fiscal
relations between countries across the globe. Greater interdependence – for instance in
trade and in banking – have a range of political and economic implications. One such
implication is the problems created by the pressure to conform to the economic standards
set in the so-called Washington Consensus (see Appendix A).
From Africa to Latin America, Asia to the Middle East, many countries have traded
pieces of their political independence in exchange for financial aid and development
loans, the vast majority of which come from Western-dominated lending institutions like
the International Monetary Fund (IMF) and the World Bank. For some, like Argentina or
Turkey cutting deals with the IMF resulted in an infusion of several billion dollars in aid
to bolster their flailing economies. In return, Buenos Aires and Ankara promised to
implement various structural reforms. As is well known, such reforms can not only cause
substantial political instability, they can also further aggravate a troubled economy and as
in the cases of Argentina and Turkey, lead to economic collapse and in the case of
Argentina the ousting of the government. As a result, these states are even more
dependent upon international lending institutions like the IMF and the World Bank – and
the loan shark nations like the United States, France and Britain that control them. As the
developing world’s debt crisis of the 1980s and early 1990s clearly demonstrates, high
levels of borrowing leave nations especially vulnerable to fiscal crises and these fuel
political unrest and conflict. Being dependent upon foreign lenders for loans, debt
forgiveness and other fiscal aid in turn means that these states give up sovereignty over
their fiscal policies. Some like Kenya and Egypt have repeatedly agreed in principle but
failed in practice to actually implement the painful structural adjustments necessary to
bring their economies in line with Washington Consensus standards. Each country’s case
is slightly different and the extent of structural reform and outside interference ranges
from merely observing and advising to direct involvement in the planning and
implementation of reforms. But in many places where reforms have been implemented,
so too has arisen political instability.
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Some countries, however, have gone another route. Rather than rely on international
lenders and thus be subject to external pressures for economic reform and risk internal
political upheaval, they have turned instead to self-financing. A prime example of this
type of economic decision-making, prompted in part by political realities, is Saudi
Arabia. Unwilling to open itself up to outside intervention, the kingdom has refused to
rely on foreign lenders for its borrowing needs. Nor has it – until now – necessarily
needed to look beyond its borders for financial relief. One of the richest countries in the
Middle East, Saudi Arabia is also one of the globe’s wealthiest energy producers, with an
estimated at 259.3 billion barrels of recoverable oil reserves – one-fourth of the world’s
proven oil reserves - and another 6.2 trillion cubic meters of natural gas. Because of its
natural resources and the massive rents earned from it, the country has been able to rely
on domestic creditors to make up the difference when faced with budget deficits. The
intent has been to prevent external actors from exerting pressure on the government and
by extension provide a greater measure of political stability. To a large extent the reliance
on internal creditors has kept foreign pressures at arms’ length. But the measures have
also engendered a precarious fiscal situation which may be – in the long run – just as
damaging to the country’s economic growth and political stability.
Analysis
Saudi Arabia has long used internal financing as a means of making up budget shortfalls.
The decision to rely on domestic credit is intended to serve as a buffer and prevent
external actors from influencing the tightly controlled kingdom’s economic and political
agendas and by extension stirring up domestic political unrest in the radically
nationalistic state. Over the last decade the government has racked up billions of dollars
of debt and that debt is now serving much of the same function – though not to as high a
degree – as foreign involvement would in constraining the government’s ability to act.
The massive internal debt has now converged with an upswing in domestic political
unrest, emerging opposition, a clash with the nation’s religious leadership and a
deteriorating alliance with the world’s only superpower, the United States, leaving
Riyadh with fewer and fewer options and an increasingly frustrated and angry public.
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The kingdom’s political stability and the ruling House of Saud’s regime has long been
assured by a complex web of tribal and business alliances cemented by a system of
patronage whereby the rulers ensure the loyalty and cooperation of the ruled. Maintaining
that network of patronage has now become increasingly difficult due to the fiscal
constraints placed by the government’s inability to pay down its debt. Despite an
abundance of natural resources and a gross domestic product of $165 billion (2001 E),
the country is now facing an internal debt crisis of mammoth proportions, estimated at
nearly $175 billion. And so, the web of alliances is unraveling and as a consequence, the
House of Saud’s long unchallenged rule is now being openly questioned and the
kingdom’s political stability threatened.
Local reports and regional analysts have predicted that the government will use the
current spike in oil prices to pay down the debt and reduce the government’s 2002 $12
billion budget deficit. Even should the government move swiftly to get its debt under
control, the underlying deficiency of the economic and political structure which prompted
the accumulation of debt in the first place remains and will continue to trigger similar and
perhaps even more expansive political crises in the future – posing a long term threat to
the country’s chances for economic growth and political stability.
The debt problem is a consequence of an inherent flaw in Saudi Arabia’s economic and
political systems. Most importantly, the economy – and the government – is almost solely
reliant upon oil rents and is extremely vulnerable to fluctuations in global oil prices. At
the same time, Saudi Arabia’s global market share is steadily decreasing as new energy
producers like Angola, Equatorial Guinea and Russia come online and other members of
the Organization of Petroleum Exporting Countries (OPEC) cartel increase their own
production capacity. Reduced market share translates into a decline in the kingdom’s
ability to influence global oil supplies and by extension, counter damaging fluctuations in
global oil prices.
The inherent instability of the country’s economic system, however, is only one piece of
the puzzle. A much more challenging piece is the country’s political structure. Built upon
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the tribal tradition of patronage and consensus building, the political dynamic requires
that the government spend massive amounts on social programs and subsidies. At the
same time, a nationalist rhetoric utilized initially to unify the country’s competing tribes
and clans and set the House of Saud up as the king of kings has locked the government
into a position whereby doing business with foreign investors is unpopular, borrowing
from foreign banks is untenable and selling Saudi national assets to foreign companies,
political suicide.
The combination of these two factors has largely prevented privatization efforts by the
government, kept would-be foreign investors at bay and forced the government to borrow
heavily from domestic creditors in order to continue providing an entire menu of social
services even during periods of waning revenue. As a consequence, Saudi Arabia has
racked up tens of billions of dollars in debt in a that in turn has severely constrained the
nation’s capital supply and limited chances for private investment and the growth and
expansion of the private sector.
It has also backed itself into a corner politically. Unable to expand the private sector and
ease widespread unemployment, reduce funding social programs or attract foreign direct
investment, the government has engendered a political backlash that has opened fissures
within Saudi society, bringing into question the legitimacy and longevity of the ruling
House of Saud and the country’s political stability. Riyadh’s deteriorating relations with
the United States further compound this situation, and the pressures brought on by the
September 11 terror attacks in America and Washington’s subsequent war on terrorism.
Background
To understand modern day Saudi Arabia and why such a wealthy country could be so
troubled by debt, its necessary to examine both the roots of the political and economic
system which serve as the foundation of the House of Saud’s regime.
The modern state of Saudi Arabia was founded in 1932 by a tribal chieftain, Abd al Aziz,
from the central Najdi region. A vast desert land about the size of Western Europe or one
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third of the continental United States, the territory now know as Saudi Arabia was then
controlled by dozens of tribes which each had their own small fiefdoms or controlled the
various oases and caravan routes. In the west, the region known as the Hijaz was
controlled by the Ottoman Empire and later by the Hashemite monarchy. To the east,
along the Gulf coast, other tribes and clans controlled the coastal cities and ports and
later, the British Empire would take many of the adjacent lands and islands as
protectorates. In the central Najdi plains, the Saud clan had long fought for territorial
control against its rivals, the Rashidi clan. But it wasn’t until Abd al Aziz, that the Sauds
would finally achieve victory.
Abd al Aziz came from a long line of would be nation builders. In 1744, his ancestor,
Muhammad ibn Saud would form an alliance with a fundamentalist religious scholar,
Muhammad ibn Abd al Wahhab, the founder of what is commonly called Wahabbism.
The alliance proved a cornerstone of the House of Saud’s right to rule. One of dozens of
tribes that lived in the Arabian Peninsula, the Sauds advanced the Wahabbi doctrine as
the only legitimate form of Islam and themselves as the keepers of the faith.
The religious aspect also helped justify their expansionary policies, by claiming that they
were restoring the one true way to worship and eradicating the corrupt practices that had
sprung up in the land since the time of the Prophet Muhammad. A reactionary and
conservative sect of Sunni Islam, Wahhabism preached against the popular Islamic
practices like the Shia pilgrimages to shrines of dead leaders and religious figures. In
order to halt these practices, the Sauds also needed a military and so raised an army from
among the bedouin and allied tribes in the name of a jihad. Ultimately however, rival
tribes defeated Muhammad ibn Saud and his army and sent his descendants fleeing into
exile in neighboring Kuwait.
Less than two hundred years later, Abd al Aziz would replicate his ancestor’s politico-
military strategy with far more success. Returning from exile in Kuwait, Abd al Aziz
again relied on the alliance with Wahabbi religious leader to help raise an army among
the beduoin. He then set about conquering the Arabian Peninsula. In 1905, the would-be
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king returned to the Najd relying on a guerrilla force culled from allied tribes. In 1921, he
defeated the rival Rashidi clan who had earlier ousted his ancestors from the Najd. Then
with the help of an army of religious warriors known as the Ikhwan (Brotherhood), which
emerged among the beduoin tribes, Abd al Aziz finally took the economically, politically
and religiously strategic western Hijaz region.
Abd al Aziz, known as Ibn Saud, also parlayed a shift in international geopolitics to
expand his territorial control and ultimately establish the kingdom. Prior to World War I,
the British Empire sought a means of weakening the Ottoman Empire. One means of
doing so was to finance Abd al Aziz al Saud’s efforts to conquer and unify the Arabian
Peninsula and thus usurp the Ottoman’s control over the religiously significant Hijaz
region, home of the two holy cities, Mecca and Medina.
Later, according to some accounts, the British would rebuke Abd al Aziz’s plans to
conquer the tiny protectorates along the kingdom’s eastern coastline such as Qatar or
what would later become the United Arab Emirates or to conduct further expansionary
military campaigns into neighboring Iraq and Jordan.
Halted at its modern day borders by the British, the dynastic aspirations of the Saudi clan
found purchase in the formation of the state. But it wasn’t until the discovery and
development of massive oil reserves that the House of Saud’s position as the country’s
uncontested rulers was solidified.
Origins of the Oil Economy As with any infant state, the government’s first priority is ensuring a source of revenues.
In the case of Saudi Arabia, the initial source was taxes. During the process of state
formation, the government relied on a variety of tariffs and taxes (zakat in Arabic) from
its various constituencies including those in Jeddah, Mecca, Medina and al Hasa
(Chaudhry 1997: 65) to fund itself and returned very little of this money in the way of
social services to those whom it taxed. Since less than one percent of the kingdom’s total
land mass is suitable for cultivation, the economy consisted primarily of subsistence
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agriculture, small crafts and caravan traffic, which local tribes provided escorts for a fee
or raided periodically. Indeed, the land’s key assets were its role as a trade route from the
Indian Ocean basin across land into Iraq and Syria and as the destination for pilgrims
visiting the holy sites of Mecca and Medina in the Hijaz region. It was these sources of
revenue that the House of Saud zeroed in on, charging everything from import and export
tariffs to taking a cut of agricultural production. A variety of non-state actors, for instance
the business elite in Jeddah, would resist the expansion of state powers and the
imposition of taxes.
The early disputes between the government based in Riyadh and business leaders and
others opposed to the taxes, however, would not have time to reach mature because of the
discovery of oil came almost immediately upon the heels of the founding of the state. In
fact, Robert Vitalis in his criticism of Kiran Chaudhry’s Prince of Wealth argues that,
“rents and not taxes were the key to the kingdom’s finances from virtually the moment of
official unification in 1932.”
Indeed, oil was first discovered in Saudi Arabia in the 1930s, only a few years after the
founding of the state. In 1933, government inked a deal with the Standard Oil Company
of California (SOCAL) giving it concession rights to explore for oil in Saudi Arabia. By
1938, the black gold started gushing near the western city of Damman (Johany et al.
1986: 30). By 1940, 5 million barrels of crude oil were being produced. By 1950, that
figure had jumped to 200 million barrels per year. A decade later the production would
more than double, reaching 482 million barrels in 1960. The trend would continue, with
production nearly doubling almost every decade up until the present day (Johany et al.
1986: 37).
Revenue figures for the early days are hard to find. But the early discovery of oil and the
resultant revenues quickly became one of the key factors determining the shape and
structure of the country’s economic and political system. Today, oil accounts for 90
percent to 95 percent of total export earnings, 70 percent to 80 percent of state revenues
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and 40 percent of the country’s gross domestic product (GDP), according to figures from
the U.S. Department of Energy, Energy Information Administration.
The vast oil wealth would have a range of consequences that would come to define the
country’s political and economic structures. Perhaps most importantly, the oil wealth
would reconfigure the government’s relationship with its citizenry. The early reliance on
taxes had by the 1950s almost been completely replaced as oil revenues began to flood
the state (Chaudhry 1997: 83). Though Riyadh still continues to this day to tax its citizens
in various ways, the taxes make up only a tiny proportion of state revenues. As such, the
citizenry has little sway over the government’s fiscal and economic policies as long as it
can continue to rely on the oil wealth and in turn buy loyalty. That, as we shall see, has
become increasingly difficult in recent years. Another impact of the oil wealth was that it
allowed the state to accelerate its efforts to centralize the economy and give it an
unprecedented independence from the nation’s wealthy elite, from a colonialist Britain
(Henry and Springborg 2001:169) and other international actors.
The release from reliance upon taxes as the key sources of revenue also gave the House
of Saud an unrivaled advantage over the kingdom’s other tribes. It allowed
Riyadh to construct a hierarchal system of patronage whereby the House of Saud at the
very top of the pyramid doled out money and favors to allied tribes and business leaders
and punished opponents by restricting access to business opportunities or funding their
competitors. This was especially true of the government disposition to favor closely
allied Najdi businessmen and tribes over the less loyal Hijazi business elite.
Rather than an adversarial relationship predicated upon taxes, the burden shifted to the
government now subsidizing the citizenry. Riyadh would gain cooperation from the
populations who lived on the land or in the areas where oil was to be extracted by
offering direct payment in the form of jobs and resettlement funds and a host of social
services and subsidies.
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Following a boom in oil prices after the 1973 oil embargo by the OPEC of which Saudi
Arabia is a key player, Riyadh launched an extensive infrastructure development program
associated with its second five year economic plan. The government focused on the
establishment of oil associated industries and the infrastructure needed to facilitate
commerce as its keys to economic expansion. The government also footed the bill for the
expansion. From 1971 to 1980, approximately 80 percent of total gross fixed capital
formation (GFCF) consisted of construction expenditures, with more than 50 percent of
the total investment coming from the government (Johany et al: 1986 26-27). Indeed, oil
related industries dominate the country’s economy: petrochemicals, plastics, fertilizer,
petroleum refining, construction and cement account for 47 percent of the Saudi GDP.
Services – most associated with the oil industry – comprise another 47 percent with
agriculture accounting for a mere 6 percent of GDP.
As the nation’s wealth increased following the oil boom in the 1970s, the government in
turn would funnel much of this money into social programs, providing nearly free health
care and education, subsidies on many necessities as well as imported luxuries. It would
also foster a nationalistic attitude that encouraged Saudi citizens to hire foreign workers
to do much of the more menial work. This later would come back to bite the government
on the nose when it could no longer easily fund the plethora of social services.
The oil wealth also allowed the government – in league with the fundamental religious
ideologists – to create and advance a nationalist dialogue centered on Saudi superiority
and religious purity. This fed a dependence upon foreign workers to fill the menial jobs
deemed beneath a Saudi. One author has labeled the Saudi refusal to take anything less
than a position of authority, status and respect, the mudir syndrome. Mudir means
director and the application is apt. It is well known that Saudi workers feel themselves
above menial labor [Champion 1999: 5]. The idea has created a serious problem for the
government, which is now trying to place Saudis in lower paying, less prestigious
opinions in order to ease unemployment.
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The arrogant notions of self-reliance and superiority – fueled by the unprecedented
wealth – allowed the government to maintain an independence from outside powers as
well. This aloofness from the rest of the world would later become one of the key factors
that led to the country’s current debt problem. It would discourage foreign direct
investment, since ownership of Saudi assets or territory by outsiders was inimical to the
nationalist ideology. The same held true for issues of foreign borrowing, since it was
deemed unacceptable to take loans from international institutions that would in turn want
to influence Saudi fiscal and economic policy. So the government would rack up of
internal debt rather than rely on external borrowing to fund the government’s budget
during periods when oil prices dropped.
The Political Economy of Saudi Oil
Another consequence of the oil money would be a mono-industry economy. As Richards
and Waterbury argue, “access to rents has allowed several states [including Saudi Arabia]
to avoid improving the efficiency with which their economies produce anything [not
related to oil] and has particularly hurt those sectors producing tradable goods.
The specialization of the Saudi economy – centered on oil rents – would be the key factor
influencing the country’s economic vulnerability and its current debt difficulties. The
country has a centrally planned, export-based economy with, “the dominance of oil in the
country’s foreign exchange earnings, government revenue, and as a source of growth of
the national income,” ( El Mallakh: 1982:27) defining its economic system. Typically
states with economic systems dominated by mineral extraction, known as rentier states,
are highly specialized, have a capital intensive industrial sector that exists largely in an
enclave and which employs a relatively small sector of the population (Karl 1997: 47-49).
Saudi Arabia is no exception. Despite wide scale infrastructure development, attempts to
diversify the economy beyond the oil sector have largely failed. Part of this is influenced
by the desire of the country’s economic players to tie into the lucrative oil industry. Terry
Lynn Karl argues that oil rents controlled by the state lead other economic actors within a
country to link up to the oil industry rather than branch out into other sectors.
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The concentration on petroleum-related industries made perfect sense for the Saudi
economy. Limited by few other natural resources, assured of oil reserves expected to last
for at least another hundred years or so and blessed with relatively minor lifting costs, the
development of petro-linked industries allows the country a key competitive advantage
on the global marketplace (Richards and Waterbury 1996: 24). But the dependence upon
oil exports and the concentration of other petro-related industries clustered around the oil
sector leaves the country highly vulnerable to fluctuating global oil prices. Per capita oil
export revenues (in inflation adjusted dollars dropped from, $23,820 in 1980 to $2,563 in
2001, according to official estimates.
Saudi Arabia Oil Export Revenues (constant dollars, billions)
1972E 1980E 1986E 2002F
$19.3 $223.2 $31.3 $48.6
- EIA OPEC Revenues Fact Sheet, June 2002
Combined with the fluctuating oil prices, the country has also seen population growth
that has far outpaced the growth of the economy. The state’s population has averaged 3
percent growth annually, according to United Nations statistics. Most importantly, youth
comprise the bulk of the population and as such have dramatically increased the number
of people seeking jobs and therefore added to the nation’s unemployment (unofficial
estimates place unemployment at around 15 percent to 20 percent, according to the
BBC.) As a consequence, real per capital income shrank dramatically while at the same
time; the fiscal burden upon the state to continue providing the subsidies and social
services begun in the late 1970s has increased. Moreover, the highly specialized oil
industry creates few jobs and those mostly clustered around the industry or in related
industries that require technical skills while most Saudi youth are channeled into schools
for religious learning and few turn to the harder natural sciences or technical fields like
engineering. Many of those that do enter the fields of the so-called hard sciences won’t
remain there. In fact, official estimates show that 27.9 percent of Saudis entering the new
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labor market will be dropouts from elementary school level and adult vocational training
programs [Champion 1999: 5].
Data on Saudi social spending is difficult to come by. Yet the country’s budget deficit
can give an indicator of the government’s inability to limit spending. For example,
planned subsidy cuts in 2000 on the country’s electricity and raised tariffs provoked
protests from both the country’s wealthy elites and the masses, prompting the
government to shelve plans for both. In 2002, the government moved to cut 20 percent
from its budget as a fiscal belt-tightening to leave room for debt repayment. The planned
cuts, however, failed to materialize and the government is now expected to run a deficit
of an estimated $12 billion dollars for fiscal year 2002, according to official Saudi
figures. In fact, Saudi Arabia has enjoyed only two years of budget surpluses since the
1980s.
Debt, Dissent and Decline
Over the last few years, Saudi Arabia has burrowed further and further into a hole of debt
from which it is having substantial trouble escaping. The cost of the 1990-1991 Gulf war
combined with lower oil prices and reduced revenue as well as a spending surge aimed at
ensuring American continued support combined to create a massive debt.
Official estimates place domestic public debt at $168 billion, or nearly 100 percent of
GDP (Financial Times quoting al Sharq al Aswat: May 2002). A recent report in the
official Arab News, the country’s English language daily, estimates the debt at $174
billion, including $63 billion owed to buyers of government bonds, $32 billion held by
commercial banks, $37 billion owed to the Pension Fund, another $18 billion owed to the
General Organization for Social Insurance, $14 billion to other unnamed funds and
organizations and $10 billion to farmers and contractors. In short, the government owes
just about everyone in the kingdom.
Moreover, though it prides itself on not holding foreign debt, many of the commercial
banks in the kingdom are joint ventures with foreign banks. For instance, the Saudi
American Bank is partly owned by Citibank. Although Citibank has only a minor
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shareholder, it is indirectly owed whatever debts the Saudi government owes the Saudi
American Bank. So though it’s not open to the types of pressure exerted by international
financial institutions like the IMF or the World Bank because of its debt, it does
indirectly have financial dealings with foreign banks. Though in this manner, the
government reduces direct intervention from Western governments.
Unlike many other nations Saudi Arabia has refused to rely on foreign lending
organizations like the Paris Club, the International Monetary Fund or the World Bank.
Other nations like Mexico and Venezuela experienced widespread social unrest following
the implementation of austerity measures dictated by international lenders aimed at
getting these countries’ debt service under control and reforming the underlying
structures of the economy so as to prevent economic collapse (Lairson 1993: 276-277).
Saudi Arabia has managed to avoid this. Refusing to borrow from international lenders,
the country was not subject to the external pressures for economic reform and
privatization that many countries have faced. Given the popular opposition to reform, the
decision not to borrow externally makes good political sense. It also means that the
government has more room to maneuver within the international political arena when it
comes to issues of economic structure and reform. For instance, though Saudi Arabia has
paid lip service to meeting standards laid out in the Washington Consensus (Henry and
Springborg 2001:13), it has taken few actual steps toward implementing these reforms.
Another interesting though murky aspect of the country’s public debt is the issuance of
government bonds. According to a variety of reports including claims by the London-
based opposition and other non-governmental organizations, the government fell into
arrears with hundreds of contractors both domestic and foreign following the 1990-1991
Persian Gulf War. Saudi Arabia along with other Gulf states ponied up an estimated $36
billion to finance the war. As a consequence, Riyadh couldn’t make payments on services
and goods and so began issuing government bonds in order to clear the arrears. Though
no figures are available regarding neither the monetary value of the bonds nor the terms
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of the bonds, most contractors reportedly then sold the bonds to local commercial banks
at a discount.
Relying almost wholly on domestic creditors, however, also means that the government
limits its short and long-term chances for economic expansion and growth. As Henry and
Springborg argue, massive public debt undercuts the country’s competitive advantage in
other sectors of the economy. This in turn limits chances for the development and growth
of the private sector – since capital is tied up in loans to the state – and thus cannot be
lent to would-be entrepreneurs.
The government also becomes more susceptible to pressure from technocrats within the
bureaucracy and from the nation’s wealthy elite. Riyadh is largely reliant upon state-
controlled banks for credit. But this gives greater importance to the wealthy elite.
Whereas before the elites relied on the government for political patronage, now the
government must turn to the wealthy business and merchant class to provide the bulk of
private investment in order to keep the economy growing. At the same time, the country’s
preeminent banking families exert an even greater influence.
Another implication of the massive debt burden is limits it places on economic expansion
in non-oil sectors. As reduced capital is available, lenders are more likely to provide
credit to ventures with a lower risk rate and higher potential rates of return. As already
stated, petro-linked industries are those most likely to attract economic actors and
because of its profitability, banks are therefore more likely to lend to businesses
connected with petroleum. In both the short and the long term, this will continue to force
economic growth and development to cluster around the oil industry, which in turn will
limit job growth and therefore not ease the unemployment crisis.
Unemployment among a large proportion of the country’s younger population fuels
frustration and political dissent. More importantly perhaps, as the private sector is
squeezed and the business elite begins to see its wealth decline, it too will begin to
pressure the government for change. The forms of this pressure will be both political and
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economic. As it stands now, government control over both the banking sector and the oil
sector gives it a lot of leeway. However, Riyadh’s inability to grow the economy will
mean that other economic actors will want to step in and take the lead. They will want
capital and greater influence over fiscal and monetary policy.
The debt burden is tightening like a noose around the neck of the Saudi regime. Caught in
a vicious cycle, the government can only hope high oil prices will be sustained for an
extended period of time and that internal frustration does not transform into political
unrest.
Damage Control
Riyadh has tried to move away from the heavy subsidies and sole reliance upon oil. In the
late 1990s, the government began discussing changes to investment laws that would
allow greater foreign investment including a reduction of taxes on foreign owned
businesses. But efforts to cut subsidies and privatize industries like the
telecommunications sector have proved widely unpopular. In late 2002, the government
announced that it would push for immediate privatization of telecommunications, civil
aviation, desalination, highway management, railways, sports clubs, municipality
services, health services and hotels (Arab News Nov. 12, 2002). The measures – if
implemented – are likely aimed at raising much needed cash and perhaps through
concessionary deals, appeasing increasingly alienated elites.
Another strategy the government has recently adopted has been the so-called Saudization
of sectors of the economy. Aimed at easing the unemployment burden the government is
trying to open more sectors of the economy to Saudi citizens and reduce the presence of
thousands of foreign workers. In early November 2002, Interior Minister Prince Nayif
ordered that only Saudis be given jobs in the jewelry shops and gold dealerships. Though
the Saudization had been ordered in 2001, non-compliance led the government to
reiterate its demand, calling for 50 percent of all jobs in the sector be held by Saudis by
the end of 2002 and by the end of 2003 for 100 percent of all jobs in the industry by held
by Saudis, reported the Saudi Arabian official English-language Arab News. Whether the
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government will enforce the order remains to be seen but the trend toward pushing
Saudization has certainly picked up steam in recent months. In 2002, the government also
issued decrees ordering the Saudization of all limousine and taxi services, sparking anger
among Saudis businessmen who can pay expatriate workers much less than Saudi citizens
for similar work.
The Noose is Tightening
The urgency with which the government is now trying to reconfigure the economy is a
product of the deteriorating political situation. Within the year, an unprecedented number
of violent incidents have broken the typically calm surface of the kingdom. In addition to
a series of bombings and attacks against Westerners, the kingdom has also seen a rise in
political unrest and public opposition from the religious elite.
The once reliable allied religious establishment has now begun questioning the House of
Saud’s legitimacy. Though much of this has been kept from the public eye, some hints
have come to light. For instance, in early November, an unnamed religious leader quoted
by BBC claimed that thousands of Saudi youth were armed and ready to fight a jihad
against American forces should the U.S. go to war with Iraq. The fracture with the
country’s religious establishment began in the mid-1990s when several vocal clerics
began criticizing the presence of American forces in the kingdom and by implication, the
House of Saud. The religious opposition converged with mounting public frustration and
increased calls for political liberalization from the nation’s intellectual and business elite
[Champion 1999: 7]. In a move aimed at appeasing public dissent, Riyadh established a
consultative council in 1993. The council is an appointed body with advisory powers
comprised of tribal, business and religious leaders and is intended to serve as a bridge of
cooperation between the government and the rest of the country’s population. But in
recent months, the council itself has begun vying for greater powers, pressuring the
government to grant it an actual legislative role.
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The failure of the economy to keep pace with a burgeoning population has fueled popular
discontent, the shifting of government patronage to Najdi allies over the last few decades
has alienated the powerful Hijazi business and merchant elite, mounting opposition and a
fracturing of the ruling House of Saud’s strategic alliance with the country’s religious
leadership has left open questions of the government’s legitimacy and finally the
embodiment of a radical opposition in the figure of Osama bin Laden has helped mobilize
radicals within the country and threaten the kingdom’s internal security.
The kingdom’s much-publicized spat with the United States further exacerbates the
internal pressures. The involvement of 15 Saudis in the September 11 terror strikes
opened a fissure in U.S.-Saudi relations that has only widened with the U.S. war against
terrorism and Washington’s plans for a war against Iraq. The House of Saud has
maneuvered to stave off the war and put off American calls for a crackdown on suspected
al Qaeda militants living in the kingdom but Washington has only increased pressure as a
response.
A decade ago, Riyadh thought that by borrowing internally, it could skirt the political
troubles experienced by external borrowers like Argentina and Mexico. To a large extent,
it has avoided the politically disruptive influence of external lenders but it has not in the
long run through its own self-financing to prevent political unrest in its own country. For
years, observers of the kingdom have warned that it was politically unstable. But only
now, has the situation begun to move toward critical mass. The convergence of the
internal dissent and external pressure comes at a time when the government is so heavily
indebted that it can neither buy off internal rivals nor use its financial sway to influence
external events. Though money is not the only determinant, the House of Saud has long
used it as the decisive tool in maintaining friends and allies. Thanks to its domestic debt,
that is not now an option.
18
Bibliography Arab News, Nov. 4, 2002. “Limousine companies call for phased Saudization.” Riyadh Arab News, Nov. 8, 2002. “Total Saudization of gold sector.” Riyadh Arab News, Nov. 11, 2002. “Deficit cut suggested to overcome debts problem.” Riyadh Arab News, Nov. 12, 2002. “Empowerment of Shoura Council likely.” Riyadh British Broadcasting Company (BBC), May 2002. “Country Profile: Saudi Arabia,”
London Champion, Daryl, 1999. “The Kingdom of Saudi Arabia: Elements of Instability Within
Stability.” Middle East Review of International Affairs. Vol. 3, No. 4. 1999. Chaudhry, Kiren Aziz, 1997. The Price of Wealth: Economies and Institutions in the Middle East, Ithaca, Cornell University Press Financial Times, May 9, 2002. “Saudi Arabia: Warning From Rising Public Debt.”
London Henry, Clement M. and Springborg, Robert, 2001. Globalization and the Politics of Development in the Middle East, Cambridge, Cambridge University Press Hudson, Michael, ed., 1999. Middle East Dilemma: The Politics and Economics of
Arab Integration, New York, Columbia University Press Johany, Ali D. and Berne, Michel, and Mixon, Jr. J. Wilson, 1986. The Saudi Arabian Economy, London, Croom Helm Karl, Terry Lynn, 1997. The Paradox of Plenty: Oil Booms and Petro-States,
University of California Press Lairson, Thomas D. and Skidmore, David, 1993. International Political Economy: The
Struggle for Power and Wealth, Fort Worth, Texas, Harcourt Brace College Publishers
Looney, Robert E., 1994. Industrial Development and Diversification of the Arabian
Gulf Economies, Greenwich, Connecticut, JAI Press Inc. Mallakh, Ragaei El, !982. Saudi Arabia: Rush to Development, Baltimore, Johns
Hopkins University Press Richards, Alan and Waterbury, John, 1990. A Political Economy of the Middle East,
Boulder, Colorado, Westview Press
19
U.S. Department of Energy, Energy Information Administration, June 2002. “OPEC
Revenues Fact Sheet,” Washington (http://www.eia.doe.gov/emeu/cabs/opecrev.html)
U.S. Department of Energy, Energy Information Administration, January 2002.
“Saudi Arabia Country Analysis Brief,” Washington (http://www.eia.doe.gov/emeu/cabs/saudi.html)
Vitalis, Robert. 1999. Review of Chaudry’s Price of Wealth in International Journal of Middle East Studies 31. 659-661
Weyland, Kurt. 1998. “The Political Fate of Market Reform in Latin America, Africa,
and Eastern Euroe.” International Studies Quarterly 42. 645-674 Appendix A
20
The Ten Commandments of the Washington Consensus asks states to:
1. reduce their budget deficits to no more than 2 percent of Gross Domestic Product
(GDP)
2. accord budgetary priority to primary health, education and infrastructure
investments (something the Saudis have done for years)
3. broaden the tax base, including interest income on assets held abroad and cut
marginal rates of taxation (which the Saudis do not do)
4. liberalize the financial system, abolishing preferential interest rates and
maintaining positive real interest rate. (Saudi financial system is liberal compared
to others in the Middle East but still favors locals over foreign investors)
5. adjust exchange rate to encourage non-traditional imports
6. liberalize trade, rapidly replacing qualitative restrictions with tariffs and
progressively reducing tariffs to 10 percent
7. remove barriers to foreign direct investment and enable foreign and domestic
firms to compete equally (runs counter to Saudi nationalist ideology)
8. privatize state enterprises (Saudis have for years planned to do this and
consistently put it off due to internal opposition)
9. abolish regulations impeding the entry of new firms or restricting competition and
insure that all regulations of a given industry are justified [and enforced]
10. secure private property rights without excessive costs, for informal as well as
formal sectors
Source: Henry and Springborg 2001: 13
21
Appendix B
Saudi Arabia’s Crude Oil Production
Year Millions of barrels
1940 - 5
1950 - 200
1955 - 357
1960 - 482
1965 - 805
1970 – 1,387
1975 – 2,583
1980 – 3,624
- source ARAMCO, Annual Operations Report, 1981, p.14: SAMA, Annual Reports,
various years; Aramco, Facts and Figures, 1983. Cited by Johany et al; p. 37
22