Economic Governance and Reform in Saudi Arabia: An Outline

Economic Governance and Reform in Saudi Arabia by Rodney Wilson

Edited by Anoushiravan Ehteshami and Steven Wright

Ithaca Press (2007)           

Useful comparison between economic management of post-2000 oil revenue boom with 1970s

·      Oil booms as reason to avoid making difficult economic reforms vis-à-vis taxation and government spending

1970s nationalization of Aramco and Beyond

·      Intervention of Oil Ministry to affect international pricing and Saudi exports = attempt to limit domestic vulnerability vis-à-vis oil price fluctuations.

·      Unlikely that Ministry will allow IOCs to invest in Aramco or admit foreign producers.

SA Power structures:

·      Merchant classes/business families – how much support/protection from the State is necessary? (rentier state: can they stand on their own two feet?)

o   Interdependence: private sector provides jobs for Saudis and prevents popular uprisings.

·      Business community = well-represented in House of Sa’ud; disproportionate representation in Majlis al-Shura

·      Tension between liberalization and democracy; greater democracy could reduce number of business members of council and increase members supported by religious institutions.

Consequences of WTO Entry

·      December 2005 (after 12 year negotiation)

·      Last of GCC to be admitted despite same external tariff (5%)

·      US/EU not extremely supportive

o   US due to 9/11 and Saudi’s position in OPEC “which Americans perceive as a body rationing oil exports in a manner contrary to free trade”

o   Saudi boycott of Israeli exports

o   Restrictions on foreign banks/insurance companies in SA- SA implemented opening of financial sector in multiple phases

o   Subsidies on agriculture—SA abandoned export subsidies; domestic food subsidies remain.

WTO entry= facilitation of commerce, increase in investor confidence

           

Macroeconomic Management

·      Ministry of Finance has controlled inflation for 20 years; fixed rate of Riyal to USD

·      Late 1990s = government debt (as proportion of GDP) peaked; recent oil revenue boom has decreased concern

·      Little external debt; however, government borrows from domestic banks = banks can’t bankroll private sector = little job creation, high unemployment

·      Absence of monetary policy/debt reform

·      Major sources of non-oil revenue = custom duties/corporate taxes – though both tax rates have been reduced = less revenue

·      IMF recommends value added tax; risks being unpopular and drawing attention to government expenditure

·      Majlis = anti-income tax

Economic Diversification

·      Minimalist interpretation= adding more value to crude oil i.e. building refineries and petrochemical production

·      Most diversity = manufacturing and services for domestic market

·      SA has largest private sector market for consumer goods in ME

Role of Private Sector

·      Private sector growth promotion = privatization of state-owned companies

o   Unlikely, government owns Aramco

o   Decisions on production levels/investment/spare capacity = controlled by Oil Ministry

·      State= more Saudi workers; private sector = more expats

Employment and Training Challenges

# of foreign workers increased 2000-2005 from 5.9M to 6.29M

Post-Rentier Economy

o   Strategy still top-down vis-à-vis industrial projects, like 1970s

o   Saudi Arabian General Investment Authority est. 2000 to encourage foreign investment

·      Matthew Simmons’ view of Malthusian crunch = simplistic

o   Economy has great capacity for growth; large investments in infrastructure- though not a lot of investment in human capital

Remaining Characteristics of Rentier State:

·      Stress on state-owned infrastructure

·      Limited alternate tax base

·      Limited population/private sector growth stimulation