Can Change Happen Fast Enough?

It is not only in the gas, and possibly oil, sectors that Saudi Arabia needs foreign investment. Its economy as it operates at present is geared more to the consumption of oil revenues than the creation of wealth. It is open to foreign capital in some areas; foreign companies can invest in industry, typically petrochemicals, and some services, but the process is highly regulated. Investors are either obliged to have majority local partners or encouraged to take partners by being taxed much more heavily if they work on their own (the Saudi partners do not pay tax at all). In several important areas foreign capital is not allowed. A foreign company may not establish its own sales operation, though increasingly big consumer goods firms are partners in the local manufacture of their products and are heavily involved in supporting their Saudi agents’ marketing. Foreigners may not own shares in Saudi public companies, or real estate. Foreign banks may not establish branches in the Kingdom. In the early 1970s there were ten foreign banks in the Kingdom, but all were forced to turn themselves into local companies and offer a majority of their shares to the public. Now there are three wholly owned Saudi banks and nine Saudi/foreign banks, two of which are shortly to merge. The government’s view for the last twenty years has been that there is no need for further institutions. Officials at the top of government agree that Saudi Arabia is largely a closed economy and they are not embarrassed by the fact. Likewise they have not been embarrassed, until recently, by the lack of transparency in government, by its antiquated (or non-existent) commercial laws and by the extreme difficulty foreigners experience in suing Saudis in Saudi courts. In matters involving important people litigation is impossible.

The public has had much the same view as the government. It has seen the country as being special on account of its oil wealth, and it has believed that this and its strict adherence to Islam ought to enable it to create an ideal rich and Godly society. This sentiment has been combined with Arab nationalist ideas, which include a suspicion of foreign companies, particularly oil companies. In effect Saudis have seen their economy as if it is a pile of wealth of fixed value, and they have felt that if they allow in foreigners some of that wealth will be taken from them. In the 1970s and early 1980s, when the Saudi economy was not much more than a process of the government collecting oil revenues, building an infrastructure and pushing as much money as possible into the hands of its people, this was a fairly valid point of view. Now it is out of date, but there are very few Saudis who have adjusted their views. There is little perception that wealth is created by all sorts of economic activity and that the presence of foreign companies will increase this activity, as well as introducing new ideas, educating the workforce and making existing Saudi firms more competitive.

In the last few years attitudes have begun to change, at least in the more senior parts of government. The government wants to join the World Trade Organisation; it is said that it intends to sign before the end of 1999. The reason is that it wants to open doors to its industrial exports, particularly petrochemicals, though whether it has yet thought through the full implications of membership for the opening of its own economy and will be able to bring itself to sign on time is an open question. While it has been talking to the WTO it has been revising parts of its commercial law. And it has been coming under pressure to liberalise from the more modern-minded parts of the business establishment, which have much contact with the world outside and are very aware of the inexorable process of globalisation. Most of the big Saudi business families are major foreign investors.

The government’s response - albeit grudging - to these pressures was seen in its acceptance of satellite television in the mid-1990s. Officially satellite dishes were, and remain, illegal, but there came a point when the King accepted that there was nothing that could be done to stop their spreading. On the same principle it was realised in 1998 that Saudi Arabia could not continue to shut itself off from the Internet.

The big question is whether economic liberalisation will come fast enough. In part this is important for maintaining the confidence of foreign investors, in so far as they are allowed to enter the country, and, on a limited scale, foreign financial markets. On two occasions recently - in August 1998 and at the end of February this year - the Saudi Arabian Monetary Agency (the central bank) has had to intervene in the markets to support the Saudi riyal. There are only limited quantities of riyals held outside the Kingdom - the riyal is not an investment currency - and so there are limits to the pressure that can be put on the currency. But any speculation against the riyal embarrasses the government. It has set itself against a devaluation. Such a move would increase its budget revenues in riyal terms, but it would damage the standard of living of its people, who are heavily dependent on imports, hurt its pride (which is hugely important), and encourage Saudi businessmen to move more of their capital to foreign markets and keep it there.

The pace of reform is more important for internal reasons. The government has to improve its finances, and this will involve it cutting subsidies and directing more of its people towards employment in the private sector. If this is not to cause considerable pain and resentment, it has not only simultaneously to do something to curb the greed of parts of the royal family, but also provide jobs and new sources of business opportunities. This is most obviously done through privatisation and opening the economy to foreign investment. The government’s budget problems suggest it should take a series of major decisions on these issues in the next few months.

The problem is that the Saudi government finds it difficult to change fast, or, more accurately, it takes a very long time considering and discussing change and then implements it fairly quickly. The issues it faces now are particularly difficult because they involve fundamental changes in the attitudes of the Saudi population. In effect the government is faced with changing its people from being largely wealth consumers to being wealth creators.

It is quite possible that it is already too late for structural reforms to help the financial crisis caused by low oil prices. If this is so 1999 or early 2000 will see the government devaluing the riyal, cutting its budget spending and introducing the types of austerity measures that the IMF has imposed on countries that have appealed to it for debt rescheduling.

© Friedrich Ebert Stiftung | technical support | net edition fes-library | September 2000

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