Economics and politics - comment and analysis
26. March 2014 I Raja Khalidi I Countries and Regions, Economic Policy

Saudi Arabia’s economy: a “Chinese Road” to Arab Capitalism? Teil I

(Eine deutsche Übersetzung folgt in den nächsten Tagen.)

“Depart from me this moment”
I told her with my voice
Said she, “But I don’t wish to”
Said I, “But you have no choice”
“I beg you, sir”, she pleaded
From the corners of her mouth
“I will secretly accept you
And together we’ll fly south”
Bob Dylan, As I Went Out One Morning

Of all the prevailing models of political and economic governance that have been challenged by the popular movements of the Arab Spring, perhaps the most intriguing regime is the tribal dynasty, and modern nation state, declared by the Saud family in the Arabian Peninsula in 1932. The economic “viability” of this state founded by warriors and nomadic herders, has always been rooted in its spectacular fossil-fuel wealth, which for the past century has rendered it and the other Arab tribal oil-states it surrounds in the Persian Gulf the focus of geo-political struggle and the generation of immense wealth for its rulers and elites: the so-called “prize”. Along with the other five members of the Gulf Cooperation Council (Bahrain, Kuwait, Qatar, UAE, Oman), these monarchies have survived wave after wave of Arab nationalism, republicanism, social unrest and more recently Islamisation.

To most outsiders (i.e., everybody outside the narrow inner circles of the ruling dynasty), Saudi Arabia is something of an enigma: an absolute monarchy ruling over 18 million subjects (and some 9 million expatriate workers), allowing no organized opposition to its self-assumed role as Guardian of Islam’s most Holy Places, sharing with its people what it deems fit from the proceeds from the nation’s natural resources, spreading its influence/wealth among nations, allies and agents in the region, and building a capitalist market economy formally integrated into the regional and global economic governance institutions, even the WTO.

Certainly, the regime’s hegemony has been challenged by internal revolts and Arab and Iranian rivalry at different stages in its history. But its bedrock of oil wealth, US strategic support and status as claimant to the “throne” of Sunni Muslim leadership, has maintained the supreme influence of this Arab gerontocracy over the years in a region which today is bubbling with youth revolts and calls for liberty, democracy and development. More recently, its pursuit of integration into global financial capital markets and networks has further strengthened its claim to legitimacy, notwithstanding the outdated and repressive form of political governance and reactionary social values that it espouses.

Saudi Arabia has always deftly leveraged its economic power within the region and beyond to advance the regime’s political agendas and national security interests ever since the international oil embargo of the 1970s, through the Iran-Iraq war and the subsequent Gulf Wars, until today’s struggles for regime change in Yemen, Egypt and Syria and beyond. Yet, for all the influence that the accumulated capital of the Saudi regime represents, buttressed by the latest fighter jets, missile weaponry and security systems that money can buy, it still has to face the same global economic forces sweeping through the region as elsewhere. And like others, even oil-rich Saudi Arabia has finite resources to maintain the lavish style of life and authoritarian mode of governance to which the royal family and the ruling classes allied with it have grown accustomed.

At first glance, the overall Saudi macroeconomic policy objectives and outlook seem reasonable, sustainable and in line with structural reform orthodoxy. With a GDP growth rate at around 5% in 2012 (as reported by the IMF-WEO) projected to weaken to 4.2% by 2017, reliance on export growth (of 5% annually in 2012/13) will be reduced to under 4%, while an expected slackening of private consumption will be compensated through higher rates of growth of total investment (currently at 26% annually, but projected to rise to 29% in the coming years). A gradual tightening of credit policy is expected to bring private credit growth below 10% from its current 15% per annum. The new normal of tolerable projected inflation at around 3.5% reflects a soft landing approach for an economy searching to reduce its chronic payments surplus from 23% of GDP in 2012 to under 13% (and trade surplus from 35% to 21%) within five years.

While economic diversification, shifting to stimulating domestic aggregate demand and labour market reform are at the top of the Saudi policy making agenda, the temptation to rely on the resource curse/blessing and an assumption of crude oil prices averaging $100/b in the medium term is one that the ruling elites and the population at large have not appeared especially motivated to resist. And with FDI and other investment flows anticipated to generate a net international investment surplus of around $120bn by 2016, from the top of the pyramid at least, the prospects for this industrializing and financializing economy seem stable and promising on the surface.

But this particular Middle Eastern model of state capitalism carries within its apparent stability a range of contradictions, between labour and capital, between haves and have-nots, between national and expatriate labour and between young and old that risk creating unmanageable fissures within this monolithic regime. Whereas other authoritarian economic governance models exhibit flexibility and planning for fundamental change as market forces are gradually liberalized (eg. China or Russia), Saudi Arabia’s efforts to address growing internal and external pressures have yet to reveal an appreciation of how much must change if the state and the regime is to survive intact. If anything, economic policies in the past few years have exacerbated real divides in the society and economy and failed to offer sustainable remedies for the inherent weaknesses of the autocratic governance model that has been the secret to its success.