No Methadone for Saudi Arabia’s Oil Addiction

Prince Mohammed this week unveiled a plan for creating a dynamic economy no longer reliant on oil. It won’t work and it won’t be just the kingdom that pays the price.

David Rosenberg
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Saudi Arabia's Deputy Crown Prince Mohammed bin Salman attends a cabinet meeting that agrees to implement a broad reform plan known as Vision 2030 in Riyadh, April 25, 2016.
Saudi Arabia's Deputy Crown Prince Mohammed bin Salman attends a cabinet meeting that agrees to implement a broad reform plan known as Vision 2030 in Riyadh, April 25, 2016. Credit: Reuters / Saudi Press Agency
David Rosenberg

Here’s a short history of Saudi Arabia — not the sort they teach in Saudi schools, if they teach history at all, but one that gets to the point of a complicated story.

It was the birthplace of Islam, but the Arabian Peninsula was quickly consigned to the backwaters of the Muslim world as faith, culture and commerce grew and developed variously in Damascus, Baghdad, Cairo, Cordoba and Istanbul. Ibn Saud’s wars uniting most of the peninsula into Saudi Arabia a century or so ago bequeathed political stability and unity to the place, and the discovery of oil shortly thereafter made the Saudis rich — and, after the 1973 oil-price revolution, supremely rich.

At home, oil profits were used to shower benefits on ordinary subjects but the regime did almost nothing to evolve politically or religiously from the days when it was little more than a loose confederation of desert tribes. Abroad, Saudi Arabia used its money to buy friends and weapons, and to punish enemies by withholding it. The Saudis more recently emerged as No. 1 in the Arab world by default, as the Arab world’s natural powers succumbed to anarchy (Iraq, Syria) or navel-gazing (Egypt). More recently, the Saudis have even begun to throw their weight around militarily, nipping revolution in Bahrain in the bud, fighting a war in next-door Yemen and assuming a leading role in the Syrian civil war.

But oil, money and power never gave the Saudis the deep power of a real state. The respect they get in the Arab world and the West was the same as Mr. Drysdale at the Commerce Bank of Beverly Hills afforded to Jed Clampett: deference extended to yahoos simply because geological good fortune made them rich as sin. The fact is that behind all its conspicuous consumption of weapons, monster-sized infrastructure projects, reconstruction of Mecca and its state-of-the-art hospitals and universities, Saudi Arabia is still a Third World country.

On the United Nations Human Development Index, Saudi Arabia ranks a respectable 39, except that the countries at the same level have less than half the $53,000 per capita gross national income the Saudis enjoy. In life expectancy, the kingdom is ranked 55th in the world, alongside Ecuador and Syria. In infant mortality it is at 166 — close to the Gaza Strip and lower than the West Bank. Transparency International ranks it 48th out of 168 countries for corruption, and on press freedom it is close to the bottom of 178 countries, according to Reporters Without Borders. All the country’s achievements — from the giant SABIC chemical conglomerate to the universities and hospitals to an armed forces bristling with the latest weapons — are due to imported labor, skills and equipment.

Low oil prices are hitting the kingdom hard, and the future doesn’t hold out much hope for better times. Even if prices recover, the Saudi economy wastes so much of its own oil that it has become a major consumer of the very stuff it needs to export in order to operate. The population is growing rapidly, which will boost oil consumption more and is straining the traditional system whereby the government creates needless public-sector jobs to create the impression Saudis are at work.

It is in this context that Deputy Crown Prince Mohammed bin Salman, who has emerged as the main man in the kingdom since his father, King Salman, ascended the throne 15 months ago, unveiled an ambitious program on Monday to wean Saudi Arabia from its oil addiction. The most detailed parts of the Vision 2030 plan are straightforward and viable enough, like selling a 5% stake in the state oil giant Saudi Aramco and topping up the country’s sovereign wealth fund to $2 trillion to serve as an endowment whose income will help replace dwindling oil revenues.

But the critical parts of the plan — the ones that aim to make Saudi Arabia a real economy where people work and produce rather than raft forward atop a stream of oil profits — only spoke of goals, not means. Prince Mohammed wants to increase the private sector’s share of the economy to 60% from 40%, reduce unemployment to 7.6% from 11% and boost non-oil income sixfold — in other words, to create a vibrant business sector. That’s the hard part and no doubt the regime is anxious about the social changes it will require.

A Saudi vendor sells fruit in Riyadh, April 25, 2016. Credit: Faisal Al Nasser, Reuters

Economists typically look at the problems like the ones Saudi Arabia suffers from as a matter of injecting the right amount of capital in the right place, creating a workforce with the right educational credentials and ensuring a business-friendly regulatory environment. Get the formula right and you’ll be the next Singapore or other miracle economy. The messy issues of culture and history are ignored, understandably: At best they are variables that no one can affect, so they are no help to the policymakers you are advising; at worst, they can opens you to accusations of racism.

But Saudi Arabia is the case par excellence for how money and education are not nearly enough to make a developed economy. The government has lavished billions on so-called economic cities and on infrastructure, the prices of inputs such as electricity are low, hundreds of thousands of Saudis have been sent abroad for higher education and the kingdom itself now has universities that lack for nothing. But Saudis have taken no advantage of any of this. The private sector, such as it is, depends on the oil largesse and is staffed and led by foreigners, who account for a stunning one-third of the country’s population. Saudi Arabia exports almost nothing but oil.

It’s not that culture is immutable. Half a century ago, China and most of East Asia looked economically hopeless, but there is little evidence that any transformation is under way in the Arab world, which passed over the industrial revolution and now seems to be standing by passively as the developed world moves into the era of knowledge economies. Vision 2030 contained some talk about letting more women enter the workforce, but nothing about allowing them to drive to their jobs. Reforming the country’s schools, which teach religion by rote, doesn’t seem to be on the agenda. Neither the regime nor ordinary Saudis seem to be interested in shaking up the cultural conservatism at the heart of the kingdom’s society. Prince Mohammed’s vision seems hopeless.

Should we care? Of course, for all its faults Saudi Arabia is an island of stability, sending its oil through thick and thin to the world’s developed economies and employing millions of Arabs whose home countries can’t provide them with jobs. But political and social upheaval as the oil economy withers away with nothing to replace it would have repercussions beyond Saudi Arabia’s borders. The kingdom needs to change, not just for its own sake but for the region and the world, but it can’t.