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

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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

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