Saudi Arabia needs realism – not a 2030 vision

The recently published economic reform plan for Saudi Arabia, Vision 2030, is heavy on aspirations and light on ways to achieve them. It is completely unrealistic. As for other recent bold initiatives (e.g. the Saudi intervention in Yemen), it should be seen in the light of Mohammed bin Salmans grab for power. The deputy crown prince is currently the de facto ruler of the country but has a limited time span to solidify his power base, given the frail health of his father the king.

A country unlike any other

Saudi Arabia plays a pivotal role in the world of energy. Over 10 % of global oil production originates from Saudi Arabia and it possesses a much larger share of global oil reserves. It’s spare capacity implies that it can (but not necessarily will) act as a short term swing producer. It’s oil policy has a key influence on the oil price – as was demonstrated once more in 2014 when it decided to defend market share rather than price.

It is a country unlike any other. Absolute power resides with the Al Saud royal family that has by now grown to include thousands of princes. The country’s name is derived from the family name – not the other way around. Oil is virtually its sole source of income in spite of decades of official policy to diversify.

For its security it relies on two pillars: oil money buying internal and external support as well as the Wahhabi religious establishment, legitimising the Al Saud regime. Both these pillars are under threat. No one knows how long the global energy transition will take but it has become increasingly clear that relying solely on oil money is unsustainable. The measures enforced by the religious establishment (e.g., women not allowed to drive) are becoming an increasingly heavy price to pay for their support.

 

The issues are overwhelming and threaten to destabilize the country in the long term

Culturally, Saudis are not being asked to be competent or successful. They are asked to comply; to their family, tribe, religion, the Al Saud regime, and to their husbands or father / brothers (if they have the bad fortune to be female). An excellent overview of Saudi society can be found in a recent book by Paul Aarts and Carolien Roelants: Saudi Arabia: a kingdom in peril.

Saudis have got used to handouts, whether it is the form of easy government jobs or subsidies. A large public sector has a workforce that is about 90 % Saudi. Its inefficiency is legendary. A much smaller private sector (with a workforce that is about 10 % Saudi) offers much lower wages, has a better record regarding efficiency, but is very much reliant on government contracts.

A fundamentalist religious force has traditionally been in charge of education. Not only does it do a poor job in preparing students for the labour market but it also instils a deep distrust in the outside world.

A religious division exists between the Sunni majority and the Shiites (about 15 % of the population, living primarily in the oil-rich eastern part of the country). The government deeply distrusts the Shiites and treats them as second class citizens. Many government jobs are out of reach for them.

Geopolitically, the country is becoming increasingly isolated. Upon the death of king Abdullah caution has been thrown into the wind. The country now has difficulty disengaging itself from an ill fated military intervention in Yemen. It sees its influence in the Arab world diminishing whilst its main competitor (Iran) is increasing its influence now that it is coming out of a prolonged period of isolation.

The special relationship with the US has been eroded. The US is gradually moving towards energy independence and is increasingly reluctant to back a fundamentalist regime. They will not forget that most of the 9/11 hijackers were Saudi and are only too well aware of Saudi efforts to export Wahhabism. “It’s complicated” was Obama’s answer to the Australian prime minister asking: “aren’t the Saudis your friends”? The Saudi government has been taken aback by the Iran nuclear agreement, the Obama administration’s lack of support for their long time Egypt ally and their limited support for regime change in Syria. They feel the US lacks an in-depth understanding of the Middle East and does not appreciate the magnitude of the threat of the Shiites and Iran to Saudi Arabia.

Economically, the country is not competitive in any industry, except for oil or industries (petrochemicals, metal processing) that benefit from cheap oil and power.

In this rentier state, handouts buy passivity rather than loyalty or gratitude. In the long run, the size of the pie is getting smaller whilst the population grows. It is estimated that 25 % of the population is living in poverty. The middle class is struggling. House prices are high and rising. Saudi graduates, unless they have good connections, are either unemployed or employed in meaningless, not very well paid government jobs. They live in a prison – but one that has full internet access. A struggling middle class and mass youth unemployment rather than jet setting superrich princes is increasingly becoming the image of Saudi Arabia.

It is the lack of coherence within the country that should be the most worrying to the Saudi rulers and most threatening to the status quo. Empires tend to fall due to the rot from within. The most dangerous moment will be when reforms are being implemented, after a long period of stagnation and oppression.

 

Vision 2030 does not stand a chance

Vision 2030 is the latest bold initiative from deputy crown prince Mohammed bin Salman (universally known as MbS). The combination of sweeping aspirations and the complete lack of discussion on how these aspirations are to be met is mind boggling. No consideration whatsoever is given on the reasons why earlier initiatives for economic reform and to diversify from oil have failed.

Among the aspirations are:

– To close the gap between education and the requirements of the job market

– To lower the rate of unemployment to 7 % by 2030

– To establish a thriving manufacturing industry, including a defense industry that can be responsible for over 50 % of military equipment spending by 2030

– To create a tourism and leisure industry of the highest international standards

– Subsidies for fuel, power and water to be eliminated

The entire document is based on a December 2015 McKinsey report: Saudi Arabia – Beyond oil. A study that looks at Saudi Arabia from an economic angle without consideration for the cultural and religious constraints. A study that looks at the country in the way that McKinsey looks at a western company that has issues with its business model.

How realistic is it to expect that a complex military industry can be built up in a little over 10 years? How realistic is to expect tourists to come to a country where alcohol is prohibited? Do they really expect a population that has lived in a rentier state for decades to change their behaviour overnight?

At least they have given some thought on how to fund these new industries: by selling a part of Saudi Aramco, probably the only Saudi enterprise that does perform to a level that is anywhere near to western standards. Have they really thought through the detailed disclosures required for such a listing? The listing of the company will be a feast for consultants and banks but is it really in the interest of the country?

Surely the fundamental issues need to be addressed. But not by such an unrealistic plan that is heavy on aspirations and light on ways to achieve them.

This country has been singularly uncompetitive in any non-oil related industry. It needs to be changed with a stepwise approach, starting with a realistic assessment of what is possible in the current situation rather than a grand vision of the future. Allowing women to drive, greatly helping their participation in the economy, would be much more beneficial than all these grand plans.

Perhaps a prince with a bachelor degree in law at King Saud University can be forgiven for thinking that he can change a country in the way that he can implement change in his royal household: by ordering it. But the McKinsey consultants should know that such a plan cannot work and should do more to justify their royal fees.

 

MbS’s grab for power may destabilize the country in the short term

MbS’s position as deputy crown prince is solely based on him being the favourite son of the king. His father is over 80, in poor health and reported to be in the early stages of dementia. MbS has a short window of opportunity to solidify his power base. He reaches out, over existing power structures, to a young population in a bid to become too popular to be deposed.

Since that he became deputy crown prince in April 2015 he is seen as the de facto ruler of the country. He is now minister of defence and chairman of the council for Economic and Development Affairs. But most importantly he is chief of the royal court, controlling all access to the king.

He has initiated a number of bold initiatives:

– the war in neighbouring Yemen, which has now become a stalemate. Whilst intense aerial bombardments have destroyed the country’s infrastructure and have brought misery to its population, a conclusion to the conflict is not anywhere near.

– the increased oppression of the Shiite minority, culminating in the execution of 47 Shiites, including one of their religious leaders (sheikh Nimr al-Nimr). What purpose does this serve apart from placating Wahhabi fundamentalists?

– the Vision 2030 plan for economic reform and the planned partial sale of Saudi Aramco.

Externally he has put the country on a collision course with its main regional rival Iran. Internally he has put himself on a collision course with established Saudi power structures such as the ministry of the interior and its security services (run by crown prince Mohammed bin Nayed, generally referred to as MbN).

MbN is currently taking a low profile and biding his time. Other parts of the royal family are reported to be deeply unhappy about the current developments.

Whereas fundamentals may destabilise the country in the long term (and this may be unavoidable), MbS’s grab for power and associated rash policies may destabilise it in the short term (and this is avoidable).

Saudi Arabia deserves better than Vision 2030. The fundamental issues need to be addressed – in a realistic way with achievable targets. Reducing the current dependency on oil and emulating Dubai will take decades, not years.

Libya style chaos with Wahhabi fundamentalists, Shiites, a secular opposition and remnants of the Al Saud regime all fighting each other is still unlikely but it is a more realistic vision than the Vision 2030 mirage.

 

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