William Bauer
Last updated: 6 June, 2012

The economic paradox of Saudi Arabia

The Saudis may be swimming in oil wealth, but the country is suffering from an economic headache and complex problem that will take years, maybe even decades, to solve.

The Kingdom of Saudi Arabia is synonymous with both a plentiful supply of oil and vast wealth derived from it. Home to over one-fifth of the world’s proven petroleum reserves and an estimated 260 billion barrels of production, Saudi Arabia is the unchallenged energy giant of the Middle East and, arguably, of the world.

Due to this natural wealth, Saudi Arabia is one the fastest growing countries worldwide and has a high GDP per capita income of roughly $24,000 per-annum. Taken into context with the wider Middle East and the booming population demographics of the Kingdom, this equates to a positive outlook. Equally, looking at new, emerging cities, the network of roads and high cost infrastructure it is always surprising to think that less than a century ago this country was still an isolated, nomadic desert nation.

However, Saudi Arabia is also a country full of economic paradoxes, with great social inequities in terms of wealth distributions, coupled with a weak private sector overly reliant on state subsidy. Indeed, the buoyancy of the Saudi economy is almost entirely influenced by oil as a primary driving factor. Figures show that oil revenue accounts for 75% of Saudi budget revenues and 90% of export earnings. These statistics hint at a fuzzy overall economic picture, suggesting that the economy is not as rosy as first meets the eye. It is therefore possible that such a positive outlook is mostly fuelled by the trickle-down of oil wealth, rather than on private sector innovation or independent growth indicative of a dynamic economy.

The first indication of an unclear economic outlook is the relatively high youth unemployment figures. A recent article by The Economist entitled “Out of the Comfort Zone”, suggested that there is an unofficial youth unemployment rate of 35% among men in their twenties – women of course are largely prohibited from working, apart from in highly specialized sectors, so realistically the figure might even be higher. It is true that most young people in Saudi Arabia now attend universities across the Kingdom, allowing for a highly educated Saudi workforce; yet many newly minted graduates then emerge into a very difficult job market.

Many Saudis view government jobs as easy, safe and secure employment, in which they receive a set salary combined with heavily subsidized healthcare, cars and housing. However, the public sector is incredibly bloated, unable to cope with the influx of new Saudi graduates. Consequently, the state – unlike in other Gulf nations – can no longer guarantee employment to all its citizens. This is a marked departure from twenty-five years ago, when unemployment was not a major societal or economic issue.

In terms of the private sector, young Saudis face issues and competition there as well. For many decades the Kingdom has born an unhealthy addiction to very cheap foreign labour in the form of workers from developing nations. As such companies were wary of employing a more expensive and comparatively less productive Saudi, to do the same job as an Indian, Bangladeshi, Indonesian, Yemeni or Pakistani worker. To combat this, the last ten years has seen the government of Saudi Arabia introducing legislation making it compulsory for all large companies in Saudi Arabia to employ thirty-percent Saudis within their workforce. Whilst this has been effective in cutting down on the number of highly paid expatriate Westerners, at the lower end of the market place very little has changed and many jobs are still the preserve of foreign immigrants.

This situation can be ascribed to poor pay, combined with social stigma surrounding employment in certain roles, dictates that many young Saudi Arabians refuse to carry out perceived menial and degrading work such as manual labour, or even working at a supermarket check-out.

Equally, when examining Saudi Arabia’s economic sector, it is striking how much the rentier state has stifled constructive, competitive growth through subsidies of key products. On paper the various large companies of Saudi Arabia look highly profitable, but they are largely paper-tigers. For example, the Saudi state will import vast quantities of raw materials and sell them at below-market cost to companies, who are then able to sell them at a globally-competitive price to their customer, generating large profits. Such economic paradoxes are very common within an economy driven and buoyed by oil.

Indeed, with so much oil at its disposal, it is only normal to presume that Saudi Arabia would be wholly energy independent. Interestingly, it is not. In the summer, for example, as the energy demand skyrockets – fuelled in part by the pressure of countless air conditioning systems on the electricity grid – Saudi Arabia must actually import oil to keep its power plants burning and generating. It estimated that if no new reserves are found, then Saudi Arabia will become a net importer of oil in twenty-five years.  Also, with the cheap, subsidised price of petrol at the pumps, there is also no check on over-consumption of oil and over-reliance on oil.

Whilst Saudi Arabia does have some success stories, in terms of its many economic and technological advances within the space of forty years, the economic facts speak for themselves. Essentially Saudi Arabia has a weak private sector and an overreliance on a natural, finite, resource in order to secure short term economic growth. This set of circumstances never bodes well for longer-term prospects.

Additionally, Saudi Arabia’s growing youth unemployment combined with a total reliance on state subsidies of key raw materials, even foodstuffs, will be problematic in the long-term for the Saudi economy. It makes it overly reliant on foreign labour, eliminates the need for innovation and competition, and ensures that there is no durable plan for future growth in a post-petroleum era.  Saudi Arabia is not a failed state economically speaking, but it has an economic headache and a complex problem that will take years, perhaps even decades, to fully and efficiently reform or solve.