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Professor Richard H. K. Vietor and Research Associate Nicole Forrest prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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R I C H A R D H . K . V I E T O R
N I C O L E F O R R E S T
Saudi Arabia: Modern Reform, Enduring Stability
We are a part of this world and we cannot be disconnected from it. We cannot be mere spectators while the
rest of the world is progressing towards a global system.
King Abdullah (then Crown Prince), May 2003
No to change, yes to development… Whatever exists in the Kingdom is already well-established; however,
there is a scope for development – development that does not clash with the principles of the nation.”
Prince Nayif, Minister of Interior, March 2003
Introduction
In the past three and a half years as King of Saudi Arabia, Abdullah bin Abdul Aziz Al Saud had
led unprecedented changes in the Kingdom.1
At 84 years of age, he was active in advancing the
country’s position internationally and securing its foundation domestically. However, dramatic
swings in the price of crude oil presented a major challenge to economic planning. In July of 2008,
the price per barrel peaked at $147 but dropped to $33 by mid-December of the same year. When
coupled with the global financial crisis, this volatility threatened the country’s long-term initiatives
for infrastructure, education and industry diversification.
King Abdullah also faced political challenges. Despite his position as monarch in an autocratic
political system, the king balanced divergent constituents. The clergy, upon whom the royal family
depended for social legitimacy, typically opposed social reforms. Domestically, the youth population
was exploding. Pressure for expanded employment opportunities and human rights was increasing.
Externally, Saudi Arabia strived to be a leader of the Muslim world. The country carefully balanced
its support for Palestine, negotiations with Iran, and a strategic relationship with the United States.
The king contemplated future stability in the region, in the state, and for the royal family. Oil
would not last forever and a new generation was coming into maturity. How much could he afford
to push modernization: politically, socially, and economically? How much would he have to?
709-042 Saudi Arabia: Modern Reform, Enduring Stability
2
History
Historically, the Arabian Peninsula had been an important trade area. The birth of the Prophet
Muhammad, however, elevated the importance of Saudi Arabia. Muhammad, the Messenger of God
(Allah), became the foundation of the Islamic religion. In A.D. 610, Muhammad began spreading the
message of Islam in the town of Mecca in the Kingdom of Saudi Arabia. In 622, Mohammed moved
to Medina where he lived until his death eleven years later. In the centuries since, Medina and Mecca
have remained the most important holy sites for the 1.3 billion Muslims throughout the world. Each
year, ten million people arrive for spiritual pilgrimages – the Hajj and the Umrah.2
For over six centuries, Saudi Arabia was ruled by various empires including the Byzantine and the
Sassanids. In the sixteenth century, the Ottoman Empire assumed control of Mecca, Medina, and
other parts of the Arabian Peninsula. By the eighteenth century, the area of modern-day Saudi
Arabia was still largely populated by semi-feudal tribes. Two important men, however, rose in
prominence and power: Mohammed bin Saud and Mohammed bin Abdul Wahhab. Ibn Saud ruled
the state of Diriya during the Ottoman’s rule. His family was sedentary, lacked nobility, and had
little inherent political leverage. “Any form of rule by the Sauds was unthinkable in tribal terms… It
was therefore absolutely necessary for the Sauds to find a way of asserting their pre-eminence over
the Arabian tribes that broke with the usual tribal syntax.”3
Ibn Abdul Wahhab was the leader of a
conservative Islamic movement promoting a return to traditional practices and principles. He
influenced a group of other conservative and puritan religious scholars and believers who adhered to
a strict interpretation of the Quran, the holy book. The movement promoted monotheism and
condemned other religious traditions. This movement was fervently adopted by a large population
and formed the foundation for the large Salafi1 community in Saudi Arabia today.
In 1744, Ibn Saud and Ibn Abdul Wahhab united to create a new state independent of the Ottoman
Empire. The two men organized a strong military and a network of conservative Islamic clergy to
form a new nation from the fragmented tribes and families of the Arabian Peninsula. By 1818,
however, the Ottomans regained control. The Al Saud family fled in exile to Kuwait but continued
their fight for an independent nation, ruled by the Al Saud family and committed to Islam. In 1824,
the Saudi state was reestablished but collapsed in 1891, due to tribal conflict. The Saud family fled to
Kuwait but Abdul Aziz Ibn Andulrahman Al Saud (Ibn Saud) recaptured Riyadh in 1902. On
September 23, 1932, Ibn Saud formally established the modern Kingdom of Saudi Arabia and
assumed the role of king. Later, to reinforce the young kingdom’s dependence on, and protection of,
Islam, King Fahad adopted the official title of “Custodian of the Two Holy Mosques.”
Country Background
Governance Structure
The royal Al Saud family continued to rule Saudi Arabia in 2009. While still Crown Prince, King
Abdullah bin Abdulaziz governed the Kingdom for the decade following the incapacitation of the
late King Fahd. Abdullah formally became king after Fahd’s death on August 1, 2005. Prince Sultan
bin Abdul Aziz Al Saud, the king’s half brother, then became Crown Prince as well as Defense
Minister. The Basic Law dictated that succession must pass to direct descendents, the sons and
grandsons, of Ibn Saud. In 2007, King Abdullah introduced Bay’ah law (succession law), the first
transparent process for the selection of a successor to the throne. The Bay’ah Council – composed of
senior royals who are direct descendants of King Abdulaziz – would elect a successor from three
1 Salafi is part of the Sunni movement and views early ancestors as models of Islam.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
3
candidates identified by the current king. Competence, as opposed to seniority, was deemed a
primary selection criterion. Measures were also taken to ensure that an incapacitated king would not
remain on the throne.
The number of princes in the royal family was estimated to be between 5,000 and 8,000.4
They
held varying levels of power and occasionally divergent and conflicting perspectives. Members of
the Al Saud family dominated prominent positions within the public and private sector. Although
the king maintained ultimate authority and veto power, a Council of Ministers advised the king and
approved legislation. The Council, established in 1953, met weekly and observed term limits of four
years. Another important body was the National Consultative (Shura) Council. King Fahd
established the council in 1992 as a component of the Basic System of Government. The Shura
Council, which has undergone substantial reform in the past decade, was based on the concept of
dialogue between scholars and society. In an advisory role, it could propose and draft legislation as
well as review and comment on the national budget. Its 150 members expanded from 90 members in
1997 to include broader national representation. Members of council were all appointed. In 2009,
over half were recently appointed. Members under the age of forty were represented. The meetings,
covered extensively by the media, convened weekly with the king addressing the council formally
once a year.
The king had also developed the Forum for National Dialogue as “a strategic measure to channel
social pressure and retain control over the content and pace of reforms.”5
This advisory body
engaged a wide variety of constituents including “pro-government spiritual leaders, liberal-Islamist
reform advocates, Shi’ites and liberal intellectuals” to discuss “extremist rights and responsibilities
for women, education, youth and perceptions of foreigners.”6
An early achievement of the first
annual National Dialogue in 2003 was the promotion of elections for half of the municipal council.
Municipal councils managed each of the country’s thirteen provinces. (At the helm, a king-appointed
royal governor led each province.) Although members of the Saud family openly questioned the
reform, the government sponsored the first elections in 2005. Some supporters of participatory
government also criticized the elections: rules included male-only eligibility, a prohibition against
revealing candidate affiliation, and tight campaigning restrictions. Critics also pointed out an overall
lack of information. Although municipal councils had only regional influence, the races proved to be
heavily contested. Hundreds ran for less than a dozen seats in some cities and villages.
Islam
Islam was the only legal religion in Saudi Arabia. “Islam, a word which means the submission of
one’s will to that of God,”7
rested on five pillars: 1) attesting to no god but God, and Muhammad as
His Prophet, 2) praying five times daily, 3) fasting during Ramadhan, 4) paying a welfare tax (Zakat)
for those in need, and 5) embarking on a pilgrimage (Hajj) to Mecca at least once in a lifetime.
The vast majority of Muslims in the country were members of the Sunni sect. Sunni Muslims
believed primarily in the Qur’an and the Sunna, sayings and teachings of the Quran by the Prophet
Muhammad which were recorded by his companions. Another sect, the Shiites, also believed in a
spiritual successor (Imam) to Muhammad who interpreted Islamic law. Although a minority group
within Saudi Arabia representing only 10% of the population, Shiites were heavily settled in nearby
Iran, Iraq, Lebanon, and Yemen.
Islam penetrated economic, cultural and political life. Integration of religion and governance
could be seen in everyday practices such as the closing of business five times daily for prayer.
Islamic Law and Royal Decree formed the backbone of the legal system. Shari’a (“right path”) was
the institutionalized Islamic law. In determining justice, the Shari’a courts issued corporal
punishment for an expansive list of offences. State-sponsored religious police, the mutawwa, enforced
709-042 Saudi Arabia: Modern Reform, Enduring Stability
4
the law. Religious leaders controlled the educational system. The close alignment of religion and
government limited freedoms of speech and press. Trade unions and political parties were banned.
Historically, the king interacted with and depended on the official clergy (ulama). However,
“during the Gulf War, the state-appointed official clergy were supplemented by an empowered
popular-level alternative clergy that was vocal and articulate.” As tension grew, some Saudis called
for an end to the ulama. The push for diverse voices within Islam presented a challenge to the AlSauds’
national control.8
Geography and Demography
The Arabian Peninsula was primarily flat with some mountainous formations. Over half of Saudi
Arabia’s land was desert. The nation was the ninth largest country in the world by territory and the
largest country on the peninsula with 829,996 square miles. It bordered Iraq, Kuwait, Qatar, the
United Arab Emirates, Yemen, Oman, and the Red Sea. The common language was Arabic. Many
spoke English as well. Saudi Arabia had a very youthful population. It was one of the fastestgrowing
countries with 45% of its population under the age of 14 and 73% under the age of 29. The
total population stood at 24.5 million in 2008. Fewer than 75% were Saudis, 25% foreigners.
The population was largely urbanized with 81% of its people living in cities. The capital city of
Riyadh, with a population of 4.5 million people, served as the political and administrative center.
Jeddah, home to 2.5 million, was the commercial capital. In the Eastern Province, Dammam was the
center of the oil industry. This province, with the largest Shi'a community, was heavily populated by
groups originating from Iran, Bahrain, and India.
Gender and Culture
Distinct social norms prevailed throughout Saudi Arabia. Men and women frequently wore
uniform dress. Males usually wore a thobe (a white full-body garment), a ghuterra (a red and white
head scarf), and an aqal (a black ring on the head). Increasingly, however, Western-style clothes had
become more popular among men. Females were obliged to wear an abaya (a black full-body
covering) and a tarha or hijab (head veil) in public. Both the mutawwa and the public at-large imposed
strong pressure on women to wear the abaya and hijab. Nevertheless, perspectives differed as to
whether this concealment represented a form of liberation or repression, a form of religious
dedication or familial respect. Saudis traced the origins of the head veil to the Quran’s mandate for
women to cover their hair. By contrast, the use of the face veil was seen by many women as a
cultural element meant to protect one’s privacy. For some, the veils were seen as “a sign of
womanhood… it provides the social comfort of being able to see without being seen.” For others, the
attire demonstrated a traditionalism, distinct from tradition. “An Islamic line of argument was here
used to maintain patriarchal social values, whereas in fact social and religious practices were here not
only distinct but contradictory.” Despite the distinction, both veils were systematically tied to Islam.
Nonetheless, many women subverted the norms by discarding the garments when hidden from the
religious police.9
Some scholars, such as Pascal Ménoret, traced the strains of gender relations to the founding of the
Kingdom. “If there is such a thing as paternalism in Saudi Arabia, it is anchored in the strategy of
taking power through women… the key to the success of the Sauds was that, in taking the helm, they
knew how to break out of their natural family group and traditional region.” Abdelaziz was said to
Saudi Arabia: Modern Reform, Enduring Stability 709-042
5
have married dozens and possibly hundreds of wives, “choosing them from the great Bedouin2
tribes, the tribal reigning families, the family of the descendants of Abd al-Wahhab, the great
sedentary families of Najd or, more prosaically, families of popular stock” to create a strong web of
connection and loyalty throughout the peninsula.10
Nonetheless, by the 1960s, education began to empower women. Iffat Al Thunayan, King Faisal’s
wife, lobbied for girls’ universal access to schooling. By the 1970s, women had developed a louder
voice, nationally and internationally. In 1977, a new law permitted women to open private
businesses. During that decade,
“when Saudi women took up the pen… they were mainly concerned to challenge the categories
in which both the East and the West had confined them; they therefore refused to embody inside
the country either social progress or regression, or to represent, in the eyes of the world, some
Islamic purity or medieval backwardness of Saudi society. They were not prepared to be the
prism through which the whole society was read…”11
The opening, however, quickly faded. By the beginning of the 1990s, Saudi Arabia tightened the
restrictions on women. “Significantly, it was just when the generation of state-educated women was
beginning to rise up the ladder and to take an active part in the economy that the state and society,
with the help of recession and political threats, hardened their line.”12
In the name of Islamic values,
gender segregation became the norm. Women were expected to be accompanied in public. A
prohibition on women driving was rigidly enforced. The severity of the restrictions was highlighted
when a group of women drove through the center of Riyadh in protest of the driving ban. Each
woman was arrested, and then lost employment as punishment. Yet, formal and informal exceptions
to social rules existed. Women routinely drove outside of the city and on foreign compounds. Some
public spaces, such as grocery stores, were integrated. The divorce rate hovered around 30-33%.
“Islamic feminism” – women using the Qur’an to individually determine the appropriateness of
gender rules – was becoming popular.13
In a few select cases, women had risen to the high ranks of
their professions and sought to use their position and wealth to progress women’s rights. At the
same time, a conservative countercurrent deepened among some women.
Women’s education and employment opportunities continued to improve in 2009. Although
most women did not work outside of the home, fifty-eight percent of [domestic] college graduates
were women. [Note: More Saudi males than females receive their education abroad.14
] Male
professors taught female students by closed circuit television, but 88% of all working Saudi women
were employed in the education sector. A few other professions, such as medicine (a field in which
9% of working Saudi women were employed), were even gender-integrated.15
Women also found
employment in banking and civil service in departments for female-only clients. The Islamic faith
granted women property ownership rights. Saudi women held 40% of the nation’s private wealth,
70% of liquid capital, 40% of real estate assets, and 20% of investment funds and portfolios.”16
Although women controlled an estimated 15,000 companies, male representatives were frequently
used for activities such as government relations.17
Education, Employment, and Welfare
Saudi Arabia depended on a large foreign population for both highly-skilled and unskilled labor.
Expatriates represented over 50% of the workforce.18
The private sector employed 5.8 million people
2 Bedouin are tribal people who typically live in the desert.
709-042 Saudi Arabia: Modern Reform, Enduring Stability
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in 2007 but only 13% were Saudi nationals.19
On one end of the spectrum, expatriates dominated lowpaying
positions. “Saudi Arabians exhibit a low preference for relatively unskilled work, stemming
from the legacy of substantial oil wealth and the ready supply of less costly South Asian labour. The
developed social welfare system also acts as a disincentive to employment.” 20
Due to its dependence
on oil and lack of taxes, Saudi Arabia had frequently been classified as a “rentier state.” Scholar
Hazem Beblawi summarized the following characteristics:
“A rentier mentality… dominates social consciousness. Living off ‘unearned income’, the
population orients itself toward easy gain rather than productive labour. Legal processes,
requiring foreign business to find local partners, buttress such attitudes. Substantial gains
accrue to the citizens through serving as the necessary kafils (sponsors) of foreign companies,
performing no serious work but earning a share of the income.”21
In 2008, the nationwide literacy rate was 83%. The maturing youth population (ages 15 to 24)
exhibited an especially high literacy rate of 95.9%. Higher education lagged when compared
globally. According to the World Economic Forum, 28% of eligible Saudis attended university
compared to a 67% average for the most competitive nations. Those students who did graduate from
university were still poorly prepared for private sector employment needs. “For every 1000 students,
Saudi Arabia produces only nine engineers, while, by comparison, Sweden and Switzerland produce
134 and 62, respectively… produces 39 science graduates per 1000 tertiary students, compared to
Sweden and Switzerland, which produce 78 and 52, respectively.” Foreigners represented 80% of
engineers, doctors and other scientists. “The highest-paying jobs are offered to expatriate workers.”22
To improve competitiveness, the Eighth Five-Year Development Plan (2005-2009) sought to raise
university and college standards. The government had more than doubled the number of domestic
universities since 2004. The national budget increased educational spending from approximately $19
billion in 2005 to $28 billion in 2008. 23
(Exhibits 9 and 10) The country’s strategy was to move
directly to a knowledge economy, importing know-how and building domestic education
infrastructure. The government focused on enhancing science and technical training in a system long
dominated by religious study. Notably, the King Abdullah University of Science and Technology
(KAUST) was planned to create an “international, graduate-level research university dedicated to
inspiring a new age of scientific achievement in the Kingdom.”24
The gender-integrated institution
near Jeddah had an endowment of $10 billion. “R&D is a dollar driven undertaking,” said a senior
government official. “You get a long way with $10 billion.”25
In addition to being one of the bestendowed
universities in the world, KAUST had a Singaporean president and attracted trustees from
renowned foreign universities such as Princeton and Cornell. Other schools, like Alfaisal University,
also formed strategic relationships with Western counterparts such as the Massachusetts Institute of
Technology.
In 2008, the Saudi government also emphasized labor reform. Productivity levels were low. Total
factor productivity was probably negative in the government sector.26
According to some estimates,
the oil sector employed a workforce twice the necessary size. 27
The labor participation rate was
similarly weak. Unemployment estimates varied but appeared to be at least 11% in 2007 (Exhibit 14).
A notable difference between labor participation and unemployment rates existed. “Saudi
participation in the labor force seems to grow sharply as Saudis enter their thirties.”28
Thus, the
number of household dependents was high – 2.4 times the global average.29
In direct response to low
labor participation and domestic workforce productivity, Saudiization became a hallmark of
proposed labor market reform. In order to increase the number of Saudis in the private sector, quotas
were instituted. In some sectors, foreigners were limited to 25% of the workforce. In banking, the
goal was 40%.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
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The Kingdom largely ignored the reality of poverty until Riyadh unrest in 2002 catalyzed the then
Crown Prince, King Abdullah. Despite the fact that a large portion of the Saudi population enjoyed a
lifestyle serviced by drivers and maids, standards of living varied. Income distribution data,
however, were not available. A rise in crime, drugs, and vagrant behavior accompanied the idleness
of unemployment and poverty. “Also troublesome is the apparent alienation or anomie that many
young Saudis feel, made evident in rampages after football games, roaming street thugs after eid
celebrations, and women being heckled at shopping malls.”30
One senior-level Saudi stated, “84% of
the population is below 40 – I worry about the excess baggage that this group brings to the political
and cultural regime; we have not prepared a strategy or vision for this 84%.”31
External Relations
Regional Neighbors
Together with Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates, Saudi Arabia
formed the Gulf Cooperation Council (GCC). Although the GCC countries differed in cultural norms
such as traditional garb, stances on alcohol, and women’s rights, travel between them was
nonetheless active. They were further united by fundamental faith in Islam as well as their
monarchical/sheikhdom political systems. They wielded collective power through their control of
over 45 percent of the world’s oil reserves and approximately a quarter of the natural gas reserves. In
December 2008, they took steps to deepen their economic interdependence by approving a draft for a
unified monetary union consisting of a central bank and a single currency. At implementation,
citizens of each country would receive improved flexibility in migration and employment. Details
regarding the new currency, such as whether it would be pegged to the dollar, had not yet been
developed. Rollout was planned for 2010 but many officials doubted the transition would happen so
soon. Prior to the currency conversion, the GCC would self-impose other fiscal, monetary, and
employment hurdles. Oman was the only GCC country to have opted out.
From inception in 1981, the GCC had ambitions beyond economic enrichment. The organization
was “formed … against the backdrop of the Islamic revolution in Iran and the Iraq-Iran war… to
guard against any threat from neighboring states and from Islamic extremism.”32
Saudi Arabia, the
most powerful member of the GCC, felt especially vulnerable. In the 1979 Iranian Revolution,
opposition overthrew the Shah with little warning. This turmoil was quickly followed by Iraq’s
invasion of Iran in 1980. Compounding the intensity of the conflicts was the schism between the
Sunni and Shiite sects of Islam.
With a global population of 170 million, Shiites were strategically positioned within and around
Saudi Arabia. Although the royal family was Sunni along with almost 90 percent of the Kingdom’s
population, the Shiite minority was heavily settled in the Eastern Provide where they composed
somewhere between 30% and 50% the population. Shiites composed 15 percent of the population in
Qatar, Afghanistan, and Bangladesh; 20 percent of Pakistan; 25 percent of Kuwait; 45 percent of
Lebanon; 65 percent of Iraq and Bahrain; and, 90 percent of Iran.33
The Iranian Revolution ushered in
new levels of visibility for the Shiites and galvanized sect loyalty.
According to critics, the United States’ post-September 11th
war in Iraq exacerbated the regional
tensions between Sunnis and Shiites. Both groups were responsible for severe violence within Iraq.
Saddam Hussein, a Sunni, was replaced by a Shiite government. The war “destroyed Iraq’s army, the
only force in the Middle East capable of containing Iran.”34
Saudi Arabia worried about the
continued mobilization of Shiites and the possibility of domestic Saudi attacks fueled by the Iranian
government. Iran’s suspected nuclear program further contributed to the uncertainty. In December
2008, Iran attended its first GCC summit as an observer – a small sign of regional normalization.
709-042 Saudi Arabia: Modern Reform, Enduring Stability
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“Palestine is the mother of all problems.”35
King Abdullah was committed to Middle East peace
and was an ardent advocate of a Palestinian state. He attempted to broker agreements between
Palestine and Israel. In 2006, Saudi Arabia earmarked $250 million for reconstruction in Gaza and the
West Bank. This contribution came in addition to $92 million in annual aid to Palestine.36
When
violence erupted between Hamas and the Palestinian Authority less than a year later, the king
mediated an agreement between the two groups. Discussions in Mecca led to a national unity
government whereby the president of the Palestinian Authority appointed a Hamas leader as prime
minister. The fragile arrangement lasted only four months.37
By the end of December 2008, violence
raged once again between Israel and Palestine and threatened regional stability. King Abdullah
consistently sided with Palestine saying, “I support every effort that is aimed at strengthening the
unity of the Muslim Ummah as well as the unity of Palestinians and their leadership… Muslims
should unify their ranks and mobilize their resources for constructive activities.”38
The Saudi
government earmarked $1 billion for further reconstruction of Gaza.
The United States
In 1933, a year after the formation of modern Saudi Arabia, King Ibn Saud granted exclusive
rights for oil exploration to an American oil company – Standard Oil Company of California (Socal).39
In the following years, the United States supported the Kingdom with military expertise and
weaponry in exchange for a supply of oil. The Arab-Israel War of 1973, however, strained the USSaudi
relationship. Saudi Arabia aligned with the Arab states while the United States aided Israel. In
response, the Kingdom imposed an oil embargo but quickly normalized relations. Both countries
recognized their mutual dependence.
King Fahd’s accommodation of America during the 1990 Gulf War incited anger among many
Islamic fundamentalists within Saudi Arabia. When Iraq invaded Kuwait, the United States stationed
600,000 troops in Saudi Arabia, protecting the country and eventually liberating Kuwait. Following
the war, American troops remained in the country.
When the official, state-appointed clergy issued a fatwa that justified the presence of U.S.
troops in Islamic vocabulary, the popular clergy responded with fatwas that condemned the
presence of U.S. troops, also grounded in Islamic vocabulary and reasoning… The alternative
clergy decried waste and imprudence in government expenditures; it highlighted the absence
of a capable military despite massive expenditures on weaponry.40
The Kingdom had fostered religious fervor and encouraged the development of “private belief
systems… spiritual awakening” as a way to maintain favor during hardship. By the 1990s, a quarter
of university students had enrolled in religious institutions. For some, the fervor became “an
organized and explicitly political movement.”41
In 1990, conservative Islamists submitted a petition
to the King that called for a closer relationship between Islamic law and governance. They also
suggested specific social reforms such as income redistribution. In 1992, another group consisting of
professors and ulema submitted the Memorandum of Exhortation. This document, instead, called for
the decentralization of Islam along with a reduction in military spending and a limit to
Westernization. King Fahd quickly and publicly denounced the petition. By 1996, anti-West
extremists launched two fatal cars bombings targeting American soldiers.
On September 11, 2001, terrorists hijacked four airplanes in the United States and crashed into the
World Trade Center and the Pentagon. The attack, coordinated by Al Qaeda, killed over 3,000
civilians. Al Qaeda leader, Osama bin Laden, as well as fifteen of the nineteen hijackers, were Saudiborn.
Although the link between Saudi Arabia and the September 11th
attack on the United States
renewed tensions, both countries remained committed to a strategic partnership and the security it
provided.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
9
The interplay between the dynamics of the US-Saudi informal alliance, domestic and external
security threats, and the country’s Wahhabi religious structures and ideology, has undermined
the coherence of policy in all of these areas… Saudi governments find themselves caught in an
acute dilemma. Either they pursue policies which are necessary for the country’s security, but
which compromise their claims to religious legitimacy, or else they avoid compromising their
religious claims, but thereby undermine the security of the state.42
Half of foreign suicide bombers in Iraq were Saudis. The Kingdom responded to the violence by
jailing suspected terrorists. Many were killed in firefights. Saudi police reportedly visited every
family with a child who had been to Afghanistan.43
In some cases, extremist groups like Al Qaeda
were “recruiting women, knowing that a conservative mother who has been indoctrinated with an
extremist ideology can influence generations, and do it away from the eyes of authorities.”44
However, less than one tenth of the Saudi population supported Al Qaeda. According to a public
opinion poll conducted by Terror Free Tomorrow at the end of 2007, 69 percent of Saudis surveyed
favored a strong US-Saudi relationship. Forty percent held a favorable opinion of the United States,
up from 11 percent in a poll taken a year earlier.45
King Abdullah carefully balanced the US-Saudi relationship while continuing to criticize the
United States for its position in the Israel-Palestine conflict. Even after Hamas won parliamentary
elections in 2006, for example, Saudi Arabia sent subsidies to Palestine but only through the
Palestinian Authority since the West had designated Hamas a terrorist organization.46
Oil
Socal, the oil company that solidified the US-Saudi relationship in the 1930’s, became Saudi
Aramco when it was nationalized by Saudi Arabia between 1973 and 1980.47
As the national oil
company, all shares were owned by the Saudi government. Profit flowed back to the Saudi state
through three channels: taxes (an 85% tax after costs, capital expenditures, etc. are deducted),
royalties at 12.5% (calculated based on well-head regardless of cost), and dividends. The effective
“tax” was 92-93% of profit, leaving sufficient cushion for a retained earnings.48
The state-owned
behemoth was operated and managed as a private company. According to the Financial Times, the
company was the largest in the world with a valuation of $781 billion.49
Through Saudi Aramco’s independent operations and through a series of joint ventures with
foreign companies, Saudi Arabia was the largest producer of crude oil in the world. The country’s
production of 9.7 million barrels per day in 2008 accounted for 13% of the world’s daily production
and 28% of OPEC3 production. Saudi Arabia was also a major exporter of crude oil. Saudi Aramco
exported 26% more oil than Russia, the next largest exporter.50
Rich in highly-prized, easily-refined
light oil, Saudi Arabia received 90% of its $230 billion export revenue from petroleum products.
Proven oil reserves were 264 billion barrels.51
At current production rates, the known reserves would
last for 75 to 80 years.
The Kingdom’s oil supply and capacity placed it in an influential position globally. Its oil reserves
accounted for a quarter of the world’s known reserves. Within OPEC, it acted as swing producer. Its
production vastly outsized the next largest OPEC producer, Iran (3.8 million barrels/day).52
Countries such as Japan and South Korea depended heavily on Saudi Arabia. Furthermore, the
proximity of emerging Asian markets such as China and India made them high margin
opportunities. Even though only 15% to 20% of Saudi Arabia’s crude oil headed to the United States,
3 Organization of the Petroleum Exporting Countries is an organization of thirteen countries.
709-042 Saudi Arabia: Modern Reform, Enduring Stability
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Saudi Arabia was the second largest exporter to the U.S. with an average of 1.4 to 1.5 million barrels a
day in 2008. Major oil expansion and exploration efforts were underway. “The planned capacity
increase would allow the Kingdom to replace all of Iran’s or Venezuela’s oil exports in the event of a
future emergency.”53
Some of the capital projects were financed through joint venture relationships
with foreign companies.
The price of crude oil had fluctuated greatly over the last decade. A wide variety of factors,
including supply shocks, demand expectations, and regional instability impacted pricing. During a
1998 crisis, the price sank to $8 per barrel. By 2001-2002, per barrel price averaged around $25, rising
to $50 in 2005 and above $60 in 2007 (Exhibit 7). Despite an annual average price of $94 in 2008, “oil
markets have had their sharpest-ever spikes and their steepest drops…all within a few months.”54
After the price per barrel briefly dropped to $35 near the end of the year, it had settled at $40 per
barrel by mid-February, 2009. In 2008, Saudi Arabia enjoyed an estimated trade surplus of $192
billion, leaving a current account surplus of $125 billion. But world oil demand in 2009 was
forecasted to decline for the first time since 1983.55
According to a Saudi Aramco official, the company planned for fluctuations by basing their
budget on lower-than-market oil prices. Most oil was sold through long-term contracts which
partially insulated the company and the country from short-term shifts. Further,
“there are indications that the GCC countries as a whole have been more careful this time
around with their oil revenues. The spending ratio (i.e. the proportion of additional oil
revenue being spent by governments) is now lower than during the boom of the 1970s. The
IMF has estimated that governments have on average spent 30 per cent of their extra oil
revenue from 2002 to 2005, compared with 75 per cent in the 1970s and early 1980s.”56
Without an income tax, Saudi Arabia needed a price between $49 and $55 dollars per barrel to
support the country.57
The true value of oil to the Kingdom incorporates both short-term budgetary
considerations and long-term opportunity costs. “Consider the real cost of oil. We have a limited
supply. First of all, we need it. We need it to earn money as we go forward. If we overuse it, it is to
our detriment. So, we should look a margin cost and discounted future cost.” 58
Although Saudi
Arabia had been an advocate for moderation of price spikes within OPEC, King Abdullah had said
that $75 per barrel was a “fair price.” And, in the words of a Saudi national, “we could be like Iraq if
something happened to the royal family.”59
Economic Reform
For much of Saudi Arabia’s early history, only a skeleton of an economic system existed. In the
first two decades after the establishment of the modern state, only the Ministries of Finance, Interior,
and Foreign Affairs existed. The development of the oil export industry in the late 1940s, however,
spurred the creation of new economic administration. Most notably, the Saudi Arabian Monetary
Agency (SAMA) was founded in 1952. During the 1950s, the private sector grew as well. Although
largely driven by enterprises directly servicing the oil industry, import companies fueled by oil
income also proliferated. Still, political relationships drove much of the development and
government spending outpaced revenue. The royal family dominated economic activity and
enhanced their own personal wealth. In 1958, the royal family was forced to seek assistance from the
International Monetary Fund.60
The 1960’s ushered in the first wave of economic planning in the country. In 1965, the Central
Planning Organization was established. By 1970, the First Development Plan was introduced. In the
meantime, the Kingdom invested heavily in oil production which led to expanded capacity in the
Saudi Arabia: Modern Reform, Enduring Stability 709-042
11
1970’s. The benefits of proactive planning were augmented by a rise in oil prices during the 1973-74
and 1979-80 periods. Saudi Arabia used the boost in revenue to embark on major economic and
infrastructure projects. The country diversified its petrochemical products as well as built schools,
improved health services, and paved roads. The boom of the 1970s and early 1980s also buoyed the
private sector. Government spending produced new opportunities for private enterprise.
Capitalizing on state prosperity and low-cost loans, independent businesses built the construction
industry and expanded the importation of goods.61
Government expenditures rose with the increase in government revenue. When oil revenue
dropped in 1982, Saudi Arabia resisted immediate cuts in its ambitious and expensive programs.
But, by the mid-1980s, the country was in full recession. Infrastructure spending was cut and the
nation’s physical resources suffered greatly. Unemployment rose; poverty worsened. The balance of
payments was in deficit. The 1991 Gulf War exacerbated economic and social turmoil since most of
the monetary burden fell on the Kingdom. As the economic slump persisted throughout the 1990s,
Saudi Arabia became more outward oriented. First, the government incurred deficits financed by
tapping reserves saved abroad and loans from internal and international market. Second, the
dependence on foreign labor deepened. The government began to turn to the private sector for
national investment.62
Despite oil revenues, the economy grew at only 1.8% per year.
At the turn of the century, Saudi Arabia began to regain control of the national economy. The
evolution of the economic system seemed a matter of survival. The government renewed its 1970’sstyle
planning and initiated a new round of large-scale development projects. This time, however,
the Kingdom could not depend only on an oil windfall. It turned to the private sector and foreign
direct investment. As early as 1993, Saudi Arabia had initiated the process of joining the World
Trade Organization (WTO) but only became a member in 2005. “Saudi Arabia needed to carry
through substantial economic reforms in order to comply with the requirements of the WTO, but the
government’s interest in WTO membership was also an outcome of the its [sic] acceptance that
reform was necessary.”63
The market liberalization measures focused on privatization, foreign direct investment, trade
liberalization and diversification. As a consequence of WTO engagement and the need for private
capital, opportunities for private sector involvement grew. Between 2001 and 2007, the private sector
grew at an average annual growth rate of 6.2%.64
Between 2004 and 2008, the number of investors in
the Saudi stock market increased from 300,000 to 10 million.65
(See Exhibits 3 and 4) The Ministry of
Telecommunications was a prime example of the government appetite for and execution of
privatization. Telecom operations at the ministry were first put into a separate corporation, fully
owned by the government. After two years of “corporatization,” 30% of the company was floated to
the public. An independent commission was appointed to regulate the industry and introduce
competition. Two additional telecom licenses were awarded. Three new fixed telephone line
companies, one large fiber optic provider, and twenty internet companies appeared. The price of all
telecom services declined and quality improved. The original Saudi Telecom Company was
profitable and even bought interests in two foreign telecom companies.66
Similarly, the insurance
industry restructured as have others. Despite the growth in the private enterprise, private sector
contribution to GDP declined from 40% to 28% between 2001 and 2007.67
An upswing in oil prices in 2003 converted a budget deficit of $5.6 billion 2002 into a budget
surplus of $28 billion in 2004 and $157 in 2008.68
(See Exhibit 6: note difference in currency) In 2007,
the government represented 54% of economic investment but the country’s infrastructure and
development needs required an infusion of foreign capital. 69
The promotion of foreign direct
investment necessitated the development of “more explicit legal frameworks and condition.”70
The
central bank, the Saudi Arabian Monetary Authority (SAMA), also gained increased independence
709-042 Saudi Arabia: Modern Reform, Enduring Stability
12
during this time.71
In 1999, the Supreme Economic Council was formed to provide oversight of
economic, industrial, agricultural, and employment policies and to accommodate the opening of
markets to overseas investment. In 2000, the Saudi Arabia General Investment Authority (SAGIA)
was created to promote FDI. That same year, a real estate law as well as a foreign direct investment
law, permitting wholly, foreign-owned companies, were introduced. In 2003, a Capital Markets Law
established the stock market. The following year, the Capital Markets Authority formed to regulate
the stock exchange.72
Legislation aimed at improving intellectual property rights had also been
introduced. The domestic banking industry was largely globalized. Giant petrochemical facilities
were built by joint ventures with companies through companies such as ExxonMobil, Chevron, and
Shell. Significant FDI had also been made in hydrocarbons. 73
Total FDI was approximately 5-6% in
2007; the national goal was 9-11%.74
Saudi Arabia sought to diversity into businesses that were both value-add and energy-dependent.
In addition to capital projects mining minerals in the western region and gas exploration in the
“Empty Quarter,”4 SAGIA spearheaded the creation of four new economic cities. Each city was to
provide “diversification within boundaries of our core competencies.”75
The government sought $500
billion from private sources, of which approximately $150 billion was expected to come from abroad.
The ambitious projects were projected to create over one million jobs and increase GDP by $150
billion by the year 2020.76
King Abdullah Economic City, north of Jeddah, was to accommodate a
major petrochemical complex operated by Saudi Aramco. Prince Abdulaziz Bin Mousaed Economic
City, near the northern city of Hail in close proximity to Iraq and Jordan, was to center around an
agricultural processing center as well as a dry port and logistics center. The Jazan Economic City on
the southwestern coast near Yemen was slated for a sea port and desalination operation. Finally, the
Economic Knowledge City in Medina would house a science and technology cluster and an Islamic
studies center. These four clusters were seen as an extension of the knowledge-society strategy that
included massive educational reform.
The king, free of formal legislative constraints, enabled economic initiatives to be implemented
rapidly. The National Competitiveness Center, supported by SAGIA, drove growth in innovation
and market sophistication. (Exhibit 16) In 2008, the World Bank ranked Saudi Arabia sixteenth out of
181 economies on the “Ease of Doing Business”.77
Aided by the boom in oil prices, the transportation
and communications sector grew by over 10% per year between 2004 and 2007; construction grew at
7.1%.78
Real GDP growth in 2007 was 3.5%; nominal GDP growth was 7.1%.79
In 2008, nominal GDP
was expected to rise by 38.3%. This equated to an economic increase of $145 billion when compared
to the previous year. “$145 billion is the same size as the economies of Pakistan and the
Philippines.”80
Actual real GDP growth in 2008 was 4.2% compares to 3.4% the previous year;
nominal GDP for 2008 grew 22% compared to 9.4% in 2007.81
Per capita GDP regained ground
towards the end of the period despite robust population growth. “Since the heyday of the oil boom,
per capita income has plummeted by two-thirds, from about $18,800 in 1981 to $6,700 in 1995.” 82
By
2002, it had risen to $8,700 and to over $18,680 by 2008.83
Despite unprecedented levels of spending, Saudi Arabia witnessed a record surplus in 2008.
Although the public surplus was already projected to be $10.7 billion, actual numbers exceeds this
estimate.84
The number was recorded to be 234% greater than the 2007 surplus and “double the
previous record high recorded in 2006 (though the surpluses of 1973 and 1974 were larger as a
percent of GDP).”85
The Saudi government used the funds to 1) reduce debt (from 19% of GDP in
2007 to 13.5% of GDP in 2008), and 2) build foreign assets at SAMA.86
In 2008, defense, education,
4 The Empty Quarter lies southeast of the plateau and is also known as Rub Al Khali.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
13
and healthcare comprised the bulk of fiscal expenditures. (See Exhibit 9) Much-needed physical and
social infrastructure was created and renewed.
Eighty-five percent of revenue was expected to be from oil in the 2009 budget87
; “for the decade to
2004, we estimate that the oil price assumption used in the budget averaged just over $16 per barrel,
around one-third of the 2008 level.”88
Oil aside, problems persisted. Saudi Arabia remained
relatively uncompetitive for trade in goods unrelated to the energy sector. Inflation, particularly in
food prices, was a major threat. Between 2002 and 2005, inflation rose from 0.2% to just under 1%. In
anticipation of growing inflation, the Saudi government released a 17-point plan to increase public
sector salaries, construct public housing, provide miscellaneous other subsidies, and encourage
greater enterprise competition. Still, by the end of 2008, oil and commodity prices had driven
inflation to 9.2%, double the previous year.89
Social Pressure
“We are proud Arab Muslims…. We like to modernize but not necessarily Westernize, and we are
different,” said Prince Bander Bin Sultan, former Saudi ambassador to the United States.90
The
September 11th
attack agitated cultural and religious frictions that had been brewing for the last ten
years. The international community pushed the royal family to take action. “The House of Saud has
reached a watershed… when it transpired that most of the criminals of 9/11 were Saudi nationals, the
Saudi family realized it was time for a showdown…”91
Some Muslims believed in a so-called sixth
pillar – jihad or “struggle.” Although some interpreted it to be a quest for spiritual perfection,
extremists used it as a call for a fight against all non-Islamic faiths. After terrorist attacks on domestic
Saudi soil, the king also had to contend with the possibility that some extremist groups such as the
Taliban – a radical group of Sunni Muslims based in Afghanistan – had a political objective of
overthrowing the Saudi government. According to one theory, the Taliban wanted to move from
Afghanistan to Saudi Arabia in order to 1) control the spiritual heart of Islam and therefore garner
religious control of the Muslim world, and 2) control a “strategic commodity the entire world
depends on. It is oil… capable of controlling an important life vein in the modern world.”92
Nonetheless, the Kingdom’s counter-terrorism effort was seen as widely effective.
In 2009, the king also faced the agendas of peaceful, but divergent, Islamic groups. The
increasingly vocal call for conservatism had led the monarch to yield substantial power to the
mutawwa. This had led to tightening of restrictions on women and other civil liberties. “The
panicked response of the regime [to the Iranian Revolution] produced two decades of political
paralysis… executing the rebels… instituting ever-tighter control over social and political life.”93
Still,
conservatives continued to seek even stricter enforcement of Islamic and cultural principles.
Moderate-liberal Islamic groups, by contrast, advocated political freedom as well as human rights
and women rights. This constituency frequently believed in the possibility of Islamic principles
coexisting with constitutional rights. In a public opinion poll, 80% of Saudi respondents questioned
stated that a free press and free elections were among the most important issues for the country.
Over 40% identified women’s right to drive as a top priority. Almost 90% said terrorism was a major
problem.94
Subtle changes, often de facto and not officially mandated, appeared. Gender integration
in the workforce increased. By 2001, women were allowed to hold individual (rather than family)
identity cards that included pictures of their unveiled face. In 2008, for the first time since a ban was
introduced in the 1980’s, there was a public screening of a movie. 95
Yet, the conflicting pressures
made Saudi Arabia “a land of two steps forward, one step back.”96
709-042 Saudi Arabia: Modern Reform, Enduring Stability
14
Looking Forward
“An investor’s primary concern is to manage risk and return; all other factors are secondary.”97
How much of a risk was the internal cultural conflict? Could attitudes towards education and
innovation be changed without addressing social and religious tensions? What were the risks?
The precipitous drop in oil prices and other commodities at the end of 2008 reminded the king of
what was at risk. OPEC had responded with a reduction in supply of 3.7 million barrels per day.
The global financial crisis impacted Saudi Arabia beyond the decline in oil revenue. Collectively, the
GCC countries held almost $2 trillion in foreign assets.98
A majority of these assets were managed by
central banks and sovereign wealth funds. While these vehicles were free of mark-to-market
pressures and could hold assets until maturity, their investment composition was likely weighted
towards riskier instruments.99
Some sources, however, claim that Saudi Arabia was distinct among
Middle Eastern countries and held mostly Treasury bills. Stock market losses as a result of the global
crisis were estimated to be $254 billion in Saudi Arabia alone.100
Stock-picking had become a national
pastime and many lost significant wealth in the decline. In response, the SAMA aimed to buy
declining stock, reduce reserve requirement to ease liquidity, and cut the repurchase rate to maintain
parity to the U.S. dollar.101
A retraction of foreign direct investment was feared. There was a constricting of international
credit facilities to finance megaprojects so the government stepped in and offered financing from the
sovereign wealth fund and reduced central bank reserve requirements from 13% to 7% to allow banks
to lend more to local companies. 102
Some capital projects were eliminated or postponed but the
government did not plan to reduce expenditures. To the contrary, budgeted spending was expected
to increase by 16% in 2009. The budget anticipated a deficit for the first time since 2002. The deficit
would be a record level in absolute terms, although only 3.5% of forecasted GDP.103
A sensitivity
analysis showed that oil prices could dip to $40 barrel per day at a 8 million barrel production level
and still only incur a deficit equal to 10% of GDP. “This would not pose a particularly arduous
challenge for the government to finance, given the strength of its underlying financial position, with
public debt, for example, now reduced to below 20% of GDP, compared with over 100% at the turn of
the millennium.”104
Saudi Arabia showed continued strength in the global Initial Public Offering (IPO) market.
Despite the global decline in activity, Saudi Arabia represented 23% ($3 billion) of global capital
raised in the third quarter of 2008 and was second only to China in market share. Saudi Arabian
Mining Company represented the largest IPO in the world for the period.105
Some scholars attributed the Kingdom’s comparative economic strength to the conservatism of
Islamic law. “Speculation, one of the causes of excessive volatility in the equity market, is not
permitted… credit is primarily supplied for purposes of buying goods and services which the seller
owns and possesses and the buyer takes delivery… The principle of assets-backed transactions
implied that each financial transaction is tied to a tangible identifiable underlying asset.”106
What would happen if oil prices experienced a collapse similar to that of 1982? Would a global
commitment to sustainable energy sources drive demand down further? Would private investors,
domestic and foreign, have the appetite to propel the major capital projects to completion? How
could the government control inflation? “The curse of oil is real – it doesn’t create jobs.”107
Unresolved economic questions were compounded by intensifying regional violence, a restless
and ill-prepared youth population, and friction among religious and social groups. Saudi Arabia’s
brief, 77-year, modern history had brought significant social and economic changes but had also been
marked by remarkable stability. In the words of one female activist, “do I think there are a hundred
Saudi Arabia: Modern Reform, Enduring Stability 709-042
15
things that need to change? Yes. But, this country has also changed massively. Just in the last ten
years. Look, I am a leader in my profession.”108
In 2009, King Abdullah created a Supreme Court and
appointed the first women to a senior government position. Ninety-five percent of the population
held a favorable opinion of him;109
“it has been a long time since a king has been so loved.”110
Now, he
needed to use the good favor judiciously to ensure the future of Saudi Arabia.
Exhibit 1 Saudi Arabia Map
Source: Courtesy of the University of Texas Libraries, The University of Texas at Austin.
http://www.lib.utexas.edu/maps/cia08/saudi_arabia_sm_2008.gif, accessed January
2009.
709-042-16-
Exhibit2EconomicIndicators,1998-2008
19981999200020012002200320042005200620072008
NominalGDP(SRbillion)546.6603.6706.7686.3707.0804.7938.81,182.51,335.61,430.61,544.1
Privateconsumption(%ofGDP)4642373837343026272830
Governmentconsumption(%ofGDP)2826262726252422232323
Grossfixedinvestment(%ofGDP)2120171818181717172021
Stockbuilding(%ofGDP)22112132222
ExportsofG&S(%ofGDP)3035444041465361636671
ImportsofG&S(%ofGDP)2723252424242628323846
Domesticdemand(%ofGDP)9788818483787367697375
RealGDP(SRbillion)608.1603.6633636.4637.2686722.1762.1786.4813861.8
RealGDPPPP(2005USdollars)391.7388.8407.7410410.5441.9465.2491506.6523.7555.1
GDPpercapita($atPPP)17,47316,92817,60617,59617,39918,54919,48421,23722,08222,83024,390
RealGDPgrowthrate2.80-0.754.870.550.137.665.275.543.173.406.00
ExchangeRate(avSR:US$)3.753.753.753.753.753.753.753.753.753.753.75
StockofM1(SRbillion)140.41156.82165.71179.70202.57223.22263.94284.57312.94384.11480.14
M1GrowthRate-0.6211.695.678.4412.7310.1918.247.829.9722.7425.00
Consumerprices(%changepa;av)-0.30-1.28-1.10-1.110.210.600.360.622.304.129.40
3-MonthSaudiriyaldepositrate6.216.146.673.922.231.631.733.755.024.802.70
Labourproductivitygrowth(%)2.70-0.90-0.209.2015.10-6.50-0.100.503.10
Totalfactorproductivitygrowth(%)3.50-0.50-0.208.1010.30-3.500.000.102.50
Source:AdaptedfromEIU,http://secure.alacra.com.ezp-prod1.hul.harvard.edu/cgi-bin/alacraswitchISAPI.dll,accessedJanuary2009.NumbersinItalicsareestimates.
Exhibit3StockMarket:TransactionVolume,1998-2008
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
19981999200020012002200320042005200620072008
NumberofTrades
Source:Tadawul,http://www.tadawul.com.sa/Resources/Reports/Yearly_en.html,accessed
January2009.
Exhibit4StockMarket:TadawulAllSharesIndexValue,Jan2008-Jan2009
0
2,000
4,000
6,000
8,000
10,000
12,000
TASIPoints
Source:CompiledfromTadawul,
http://www.tadawul.com.sa/wps/portal/!ut/p/_s.7_0_A/7_0_49I/.cmd/ChangeLang
uage/.l/en/,accessedJanuary2009.
709-042-17-
Exhibit5BalanceofPayments
(US$million)2001200220032004200520062007
BalanceofPayments
CurrentAccount9,35311,87328,04851,92690,06099,06695,080
Goods:Exportsf.o.b.67,97372,46493,244125,998180,712211,305234,145
Goods:Importsf.o.b.-28,607-29,624-33,868-41,050-54,595-63,914-82,597
GoodsBalance39,36642,84059,37684,948126,117147,391151,548
Services:Credit5,0085,1775,7135,8526,6777,2977,901
Services:Debit-7,155-7,152-7,936-11,057-14,520-19,390-30,798
BalanceonGoods&Services37,21940,86557,15379,743118,274135,298128,651
Income:Credit4,1253,7142,9774,2784,96410,37615,014
Income:Debit-4,644-3,925-4,277-3,800-4,963-9,734-14,776
BalanceonGoods,Services&Inc.36,70040,65455,85380,221118,275135,940128,889
CurrentTransfers:Credit———————
CurrentTransfers:Debit-27,346-28,782-27,804-28,293-28,215-36,874-33,808
FinancialAccount-11,262-9,137-26,440-47,428-90,525-98,172-88,912
Oil&otherCapitalTransactions*20-614-587-334464660-8,069
NetPortfolioInvestment-2,7977,552-18,738-26,654-67,420-78,567-81,727
OtherInvestmentAssets-7,197-11,644-6,333-21,955-28,717-17,664-11,391
Banks4901,0333,842-3,124365-9,203-10,411
OtherSectors-7,687-12,677-10,175-18,831-29,083-8,461-980
OtherInvestmentLiabilities-1,288-4,4317831,5165,149-2,60112,275
Banks-1,288-4,431-7831,5165,149-2,60112,275
OtherSectors———————
NetErrorsandOmissions0000000
ChangeinReserves1,909-2,736-1,608-4,498465-894-6,168
Source:AdaptedfromIMF,InternationalFinancialStatistics,http://www.imfstatistics.org.ezp-prod1.hul.harvard.edu/imf/,accessedMarch3,2009.
*CategoryHeadingfromSaudiArabiaMonetaryAgency,44thAnnualReport,p.332,
http://www.sama.gov.sa/sites/SAMAEN/ReportsStatistics/ReportsStatisticsLib/5600_R_Annual_En_44_2008_09_23.pdf,accessedMarch3,2009.
Exhibit5aSaudiArabia’sForeignDirectInvestment,2001-2007-millionsofUSDollars
1990-2000
Average2001200220032004200520062007
Inward2455044537781,94212,09718,29324,318
Outward2436121438378531,25713,139
Source:CompiledusingdatafromWorldInvestmentReport2005,UnitedNationsConferenceonTradeandDevelopment,http://www.unctad.org/en/docs/wir2005_en.pdf,accessedMarch5,2009,
andWorldInvestmentReport2009,UnitedNationsConferenceonTradeandDevelopment,http://www.unctad.org/en/docs/wir2008_en.pdf,accessedMarch5,2009.
709-042-18-
Exhibit6FiscalBudget
(inSRbillions)19981999200020012002200320042005200620072008
2009
(Budget)
Revenues1421482582282132933925646746431,100410
Oil80.0104.4214.4183.9166.1231.0330.0504.5604.5562.2950en/a
Other61.643.043.644.246.962.062.359.834.580.6150en/a
Expenditures190184235255234257285346393466510475
Current171167217224204224248284322347n/a250
Capital191718323034386271119n/a225
Deficit/Surplus(48)(37)23(27)(21)36107218281177590(65)
Source:AdaptedfromSAMA44thReport,p.305.References:MinistryofFinance.2008estimatesand2009nationalbudgetnumbersfromJadwaInvestment,23Dec2008.2008oilrevenueisestimated
at85-90%oftotalrevenue.
Exhibit7ProjectedNationalExpenditures,FY2009
Educationand
Manpower
26%
Healthand
SocialServices
11%
Transportation
andTelecom
4%
Other
15%
Infrastructure,
Agriculture,
Water
7%
Defenseand
Security
33%
Municipality
Services
4%
Source:Compiledfrom“SaudiArabia’s2009Budget,”JadwaInvestment,23December
2008,pp.2-3.
Exhibit8ComparisonofEducationSpendingas%ofGNI,WEFTop10
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Source:Adaptedfrom“TheCompetitivenessReview:January2008:TheEducationSectorinSaudiArabia,”
TheNationalCompetitivenessCenter/SAGIA,p.26.References:GlobalCompetitivenessReport2007-
2008,WorldEconomicForum.
709-042-19-
Exhibit9AveragePriceofCrudeOil,2007–January2009
0.00
20.00
40.00
60.00
80.00
100.00
120.00
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
PriceofCrudeOil
(AverageAnnual)
Price
Source:AdaptedfromBPwebsite,http://www.bp.com/sectiongenericarticle.
do?categoryId=9023773&contentId=7044469,accessedJanuary2009.Number
for2009isJanuaryonly.
Exhibit10AnnualEnergyProduction,2003-2007
200320042005200620072008
CrudeOil(1,000b/d)8,4108,8979,3539,2078,8169,370
NaturalGas(mncum)67,92076,46081,35085,00183,280
RefinedProducts(1,000b/d)1,7611,9131,9741,9601,874
Source:“AnnualStatisticalBulletin:2007,”OrganizationofthePetroleumExportingCountries,pp.58,63,76.
Exhibit11WorkforcebyAge,2007
AgeWorkforceUnemployment
(%ofTotalPopulation)(%withinWorkforce)
15-19134.3
20-248.729
25-2918.410.5
30-34212.8
35-3917.80.4
40-4413.50.7
45-4990.4
50-545.30.2
55-592.80.4
60-641.20
65+1.30
Source:AdaptedfromSAMA44
th
Report,p.231.References:CentralDepartmentofStatistics
andInformation,MinistryofEconomyandPlanning.
Exhibit12PrivateSectorWorkforcebySexandNationality,2007
Males
Females
Saudis
Non-Saudies
Source:AdaptedfromSAMA44
th
Report,p.233.
709-042-20-
Exhibit13SaudiArabianNationalvs.ExpatriateParticipationbySector
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Expatriates
SaudiArabianNationals
Source:Adaptedfrom“TheCompetitivenessReview:January2008:TheEducationSectorinSaudiArabia.”
TheNationalCompetitivenessCenter/SAGIA.p.36.References:SaudiArabianMonetaryAgency
andCentralDepartmentofStatistics.
Exhibit14UnemploymentamongSaudiArabianNationals
0%
2%
4%
6%
8%
10%
12%
14%
2001200220032004200520062007
Source:AdaptedfromSAMA44
th
Report,p.242.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
21
Exhibit 15 "Ease of Doing Business" Ranking, 2008
16a
28 Procedures (#) 7 24 Disclosure Index 8
Duration (days) 12 Director Liability Index 8
Cost (% GNI per capita) 15 Shareholder Suits Index 3
Paid in Min. Capital (% GNI per capita) 0 Investor Protection Index 6.3
50 Procedures (#) 18 137 Procedures (#) 44
Duration (days) 125 Duration (days) 635
Cost (% of income per capita) 75 Cost (% of claim) 28
1 Procedures (#) 2 57 Time (years) 1.5
Duration (days) 2 Cost (% of estate) 22
Cost (% of property value) 0 Recovery rate (cents on the dollar) 38
7 Payments (#) 14 16 Documents for export (#) 5
Time (hours) 79 Time for export (days) 17
Profit tax (%) 2 Cost to export (US$ per container) 681
Labor tax and contributions (%) 12 Documents for import (#) 5
Other taxes (%) 0 Time for import (days) 18
Total tax rate (% profit) 15 Cost to import (US$ per container) 678
45 Difficulty of Hiring Index 0 59 Legal Rights Index 4
Rigidity of Hours Index 40 Credit Information Index 6
Difficulty of Firing Indix 0 Public registry coverage (% adults) 0
Rigidity of Employment Index 13 Private bureau coverage (% adults) 14
Firing costs (weeks of salary) 80
Ease of Doing Business
Protecting
Investors
Enforcing
Contracts
Closing a
Business
Starting a
Business
Paying Taxes
Employing
Workers
Trading
Across Borders
Getting Credit
Dealing with
Construction
Permits
Registering
Property
Source: Compiled from “Doing Business 2009: Country profile for Saudi Arabia,” The World Bank, 2008.
a Rank out of 181 countries.
Exhibit 16 Global Rankings
Ranking Agency Focus Countries Covered Rank Year
World Bank/ Environment for doing business 181 16 2008
International Finance Corporation (IFC)
World Economic Forum (WEF) Overall competitiveness 134 27 2008
UNCTAD Total FDI inflow 188 18 2008
FDI performance relative to potential 51 2008
Milken Institute Company access to capital 122 36 2007
Corporate transparency 48 43 2008
Heritage Foundation Degree of government economic interference 162 60 2008
Transparency International Perceived levels of corruption 180 79 2007
Source: Adapted from: “The Competitiveness Review, January 2009: An Update on Saudi Arabia’s 10x10 Program.” The
National Competitiveness Center/SAGIA. p.19,
http://www.saudincc.org.sa/CMSPages/GetFile.aspx?guid=fc3b89fe-b893-4a74-8749-d4b04114d398, accessed
January 29.
709-042 Saudi Arabia: Modern Reform, Enduring Stability
22
Endnotes
1
Professor Vietor is immensely grateful to HRH Mohammed K.A. al-Faisal for arranging his interviews and
facilitating his research trip in Saudi Arabia.
2
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 13.
3
Pascal Ménoret, The Saudi Enigma: A History, Trans. by Patrick Camiller (London: Zed Books, 2005), p.85.
4
Iris Wurm, In Doubt for the Monarchy:Autocratic modernization in Saudi-Arabia, PRIF-Reports No.81,
(Frankfurt: Peace Research Institute, 2008), p.4. References: Guido Steinberg, Die innenpolitische Lage SaudiArabiens
nach dem 11, September 2001, DOI-Focus, Nr.8, p.9.
5
Iris Wurm, In Doubt for the Monarchy, p.22.
6
Iris Wurm, In Doubt for the Monarchy, p.22. References: Henner Furtig 2005a, Saudi-Arabien, in: Faath,
Sigrid (Hrsg.): Demokratisierung durch externen Druck? Perspektiven politischen Wandels in
Nordafrika/Nahost, Hamburg, p. 276.
7
Mona Almunajjed, Saudi Women Speak: 24 Remarkable Women Tell their Success Stories, (Beirut: Arab Institute
for Research and Publishing, 2006), p.9.
8
Gwenn Okruhlik, “Empowering Civility through Nationalism: Reformist Islam and Belonging in Saudi
Arabia,” Robert W. Hefner, Remaking Muslim Politics: Pluralism, Contestation, Democratization, (Princeton, NJ:
Princeton University Press, 2005), p.199.
9
Quotes and information in paragraph drawn from Pascal Ménoret, The Saudi Enigma, pp. 178 and 182.
10
Quotes and information in paragraph drawn from Pascal Ménoret, The Saudi Enigma, pp.84-85.
11
Pascal Ménoret, The Saudi Enigma, p. 176.
12
Ibid., p. 182.
13
Pascal Ménoret, The Saudi Enigma, p. 186.
14
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, pp. 13 and 191.
15
Mona Almunajjed, Saudi Women Speak, p.26. References: Al Riyadh Newspaper, No. 131270, June 2004.
16
Mona Almunajjed, Saudi Women Speak, p.28. References: Arab News, 14 August 2005.
17
Pascal Ménoret, The Saudi Enigma, p. 183. References: Mai Yamani, Changed Identities: The Challenge of the
New Generation in Saudi Arabia, (London: Royal Institute of International Affairs, 2000), p. 106.
18
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 21.
19
“Forty Fourth Annual Report,” Saudi Arabian Monetary Agency, Research and Statistics Department,
1429H (2008G), p. 233.
20
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 193. References the National
Competitiveness Centre/SAGIA.
21
Tim Niblock with Monica Malik, The Political Economy of Saudi Arabia, (London: Routledge, 2007), p. 16.
References: Hazem Beblawi, “The Rentier State in the Arab World,” The Rentier State, Hazem Beblawi and
Giacomo Luciano (eds), (London: Croom Helm, 1987), pp. 52-53 and 56.
22
Quotes and information in paragraph drawn from “The Report: Saudi Arabia 2008,” Oxford Business
Group, London, pp. 13, 191, and 193.
23
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, pp. 13, 44, and 190.
24
King Abdullah University of Science and Technology website
<http://www.kaust.edu.sa/about/default.aspx>. Accessed November 18, 2008.
25
Interview with Senior Government Official
Saudi Arabia: Modern Reform, Enduring Stability 709-042
23
26
Interview with Brad Bourland, Chief Economist and Head of Proprietary Investment, Jadwa Investment
27
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 32.
28
Interview with Brad Bourland, Chief Economist and Head of Proprietary Investment, Jadwa Investment
Interview
29
Mohamed A. Ramady. The Saudi Arabian Economy: Policies, Achievements and Challenges. (New York:
Springer Science+Business Media, 2005), pp.351-352. References: Al Sheikh, 2003.
30
Gwenn Okruhlik, “Empowering Civility through Nationalism,” p.200.
31
Interview with Majid Al-Kassabi, Director General, Sultan Bin Abdulaziz Al Saud Foundation.
32
“Profile: Gulf Co-operation Council,” BBC, 17 September 2008,
<http://news.bbc.co.uk/2/hi/middle_east/country_profiles/4155001.stm>. Accessed January 5, 2008.
33
Mark Weston, Prophets and Princes: Saudi Arabia from Muhammad to the Present, (Hoboken, NJ: John Wiley &
Sons, Inc., 2008), pp. 514-515.
34
Mark Weston, Prophets and Princes, p. 515.
35
Interview with Majid Al-Kassabi, Director General, Sultan Bin Abdulaziz Al Saud Foundation.
36
Mark Weston, Prophets and Princes, pp. 510-511.
37
Ibid., p. 511.
38
P. K. Abdul Ghafour, “King tells Palestinians to stand united,” Arab News, 5 January 2009.
39
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 11.
40
Gwenn Okruhlik, “Empowering Civility through Nationalism,” p.196.
41
Quotes and statistics in the beginning of this paragraph from Gwenn Okruhlik, “Empowering Civility
through Nationalism,” pp.195, 196, and 198.
42
Tim Niblock, Saudi Arabia: Power, Legitimacy, and Survival, (New York: Routledge, 2006), p.144.
43
Interview with Brad Bourland, Chief Economist and Head of Proprietary Investment, Jadwa Investment
44
Discussion with Mohammed K.A. al-Faisal, Al Faisalah Group.
45
Information in paragraph drawn from “Results of a New Nationwide Public Opinion Survey of Saudi
Arabia.” Terror Free Tomorrow: The Center for Public Opinion, Washington, DC, pp.2-3.
46
Mark Weston, Prophets and Princes, pp. 510-511.
47
Noel Maurer and Carlos Yu, “Filling the Empty Quarter: Saudi Aramco and the World Oil Market,” HBS
Case No. N2-708-048 (Boston: Harvard Business School Publishing, Rev: February 28, 2008), p. 2.
48
Interview with Aramco official
49
Noel Maurer and Carlos Yu, “Filling the Empty Quarter: Saudi Aramco and the World Oil Market,” p.3.
References: Francesco Guerrera and Carola Hoyos, “Sudi Aramco revealed as biggest group,” Financial Times, 15
December 2006.
50
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 91.
51
“Annual Statistical Bulletin,” OPEC, 2007, p.9.
52
Ibid., p.9.
53
Noel Maurer and Carlos Yu, “Filling the Empty Quarter: Saudi Aramco and the World Oil Market,” p.1.
54
Jad Mouawad, “Big Oil Projects Put in Jeopardy by Fall in Prices,” The New York Times, 16 December 2008.
55
Ibid.
709-042 Saudi Arabia: Modern Reform, Enduring Stability
24
56
Tim Niblock with Monica Malik, The Political Economy of Saudi Arabia, (London: Routledge, 2007), p. 179.
57
Data from Chip Cummins, “Bahrain Credit Outlook is Downgraded,” The Wall Street Journal, 7 January
2009, p. A7 and Lesley Stahl, “The Oil Kingdom: Part One,” CBS News/60 Minutes Video,
<http://www.cbsnews.com/video/watch/?id=4653109n>, Released 8 December 2008. Accessed 18 December
2008.
58
Interview with Senior Government Official
59
Interview with Saudi businessman.
60
Tim Niblock with Monica Malik, The Political Economy of Saudi Arabia, p. 32, 33.
61
Ibid., pp.34-35, 52-54.
62
Ibid., pp. 94-95, 174.
63
Ibid., p. 177.
64
“Forty Fourth Annual Report,” Saudi Arabian Monetary Agency, Research and Statistics Department,
1429H (2008G), p. 125. References: Central Department of Statistics and Information, Ministry of Economy and
Planning.
65
Interview with Fahad Almubarak, Chairman and Managing Director, Morgan Stanley Saudi Arabia.
66
Ibid.
67
“Forty Fourth Annual Report,” Saudi Arabian Monetary Agency, Research and Statistics Department,
1429H (2008G), p. 125. References: Central Department of Statistics and Information, Ministry of Economy and
Planning.
68
“Forty Fourth Annual Report,” Saudi Arabian Monetary Agency, Research and Statistics Department,
1429H (2008G), p. 305. References: Ministry of Finance. 2008 number from “Saudi Arabia’s 2009 Budget,” Jadwa
Investment, <www.jadwa.com>, 23 December 2008.
69
Interview with Senior Government Official
70
Tim Niblock with Monica Malik, The Political Economy of Saudi Arabia, p. 174.
71
Mohamed A. Ramady, The Saudi Arabian Economy, p. 80.
72
All law information from Tim Niblock with Monica Malik, The Political Economy of Saudi Arabia, pp. 186-190.
73
Interview with Senior Government Official
74
Interview with Senior Government Official
75
Interview with Senior Government Official
76
“The Report: Saudi Arabia 2008,” Oxford Business Group, London, p. 27
77
“Doing Business 2009: Country profile for Saudi Arabia,” The World Bank, <www.worldbank.org>, 2008.
78
“Forty Fourth Annual Report,” Saudi Arabian Monetary Agency, Research and Statistics Department,
1429H (2008G), p. 124. References: Central Department of Statistics and Information, Ministry of Economy and
Planning.
79
“Saudi Arabia’s 2008 Budget,” Jadwa Investment, <www.jadwa.com>, 10 December 2007, p.6.
80
“Monthly Bulletin: Oil in Retreat,” Jadwa Investment, <www.jadwa.com>, September 2008. p. 6.
81
“Saudi Arabia’s 2009 Budget,” Jadwa Investment, <www.jadwa.com>, 23 December 2008, p.5.
82
Gwenn Okruhlik, “Empowering Civility through Nationalism,” p. 200.
Saudi Arabia: Modern Reform, Enduring Stability 709-042
25
83
“January 2009 Monthly Report,” Economist Intelligence Unit, p.18 and “The Saudi Economy’s Golden Era:
Phase Two,” Jadwa Investment, <www.jadwa.com>, July 2007, p.2. References: Central Department of Statistics.
84
“Saudi Arabia’s 2008 Budget,” p.1.
85
“Saudi Arabia’s 2009 Budget,” p.4.
86
“Saudi Arabia’s 2008 Budget,” p.5. and “Saudi Arabia’s 2009 Budget,” pp.4-5.
87
“Saudi Arabia’s 2009 Budget,” Jadwa Investment, <www.jadwa.com>, 23 December 2008, p.3.
88
“Saudi Arabia’s 2008 Budget,” Jadwa Investment, <www.jadwa.com>, 10 December 2007, p.3.
89
“Saudi Arabia’s 2009 Budget,” Jadwa Investment, <www.jadwa.com>, 23 December 2008, p.6.
90
PBS Frontline, “Interview with Bander Bin Sultan,” September 2001, <www.pbs.org>.
91
Tarek Heggy, “Let the Sane of Saudi Arabia Unite,” 21 November 2007, www.windsofchange.net.
92
Turki Al Hamad, “Talibanism – from Afghanistan to Saudi Arabia,” Asharq Al-Awsat newspaper, Saudi
Arabia, December 2003.
93
Gwenn Okruhlik, “Empowering Civility through Nationalism,” p.194.
94
“Results of a New Nationwide Public Opinion Survey of Saudi Arabia.” Terror Free Tomorrow, p.4.
95
Wael Mahdi, “Curtain may be rising on Saudi cinemas,” The National, December 14, 2008,
<http://www.thenational.ae/article/20081214/FOREIGN/468724863/1011/NEWS>. Accessed January 2009.
96
Sultan Al Qassemi, “The land of two steps forward and one step back,” The National,
<http://thenational.ae/article/20081228/OPINION/396030844/1080>. Accessed December 2008.
97
Interview with Senior Government Official
98
Eckart Woertz, “Impact of the US Financial Crisis on GCC Countries”, Gulf Research Center, October 2008,
p.8.
99
Eckart Woertz, “Impact of the US Financial Crisis on GCC Countries”, p.9.
100
“The Global Financial Crisis and its Impact on the GCC,” Gulf One Investment Bank, Research Bulletin,
Vol. 1, No. 11, October 2008, p.14.
101
“The Global Financial Crisis and its Impact on the GCC,” Gulf One Investment Bank, p.11.
102
Interview with Fahad Almubarak, Chairman and Managing Director, Morgan Stanley Saudi Arabia.
103
“Saudi Arabia’s 2009 Budget,” Jadwa Investment, <www.jadwa.com>, 23 December 2008, p.2.
104
Statistics and quote from “Saudi Arabia: Why US$75/barrel?”, 1 January 2009, Economist Intelligence
Unit.
105
“IPO’s in the Gulf and MENA Region: Global and regional IPO analysis and outlook,” Ernst & Young,
October 2008, Slides 8 and 23.
106
“The Global Financial Crisis and its Impact on the GCC,” Gulf One Investment Bank, pp. 24-25.
107
Interview with Senior Government Official
108
Interview with prominent Saudi businesswomen.
109
“Results of a New Nationwide Public Opinion Survey of Saudi Arabia.” Terror Free Tomorrow, p.4.
110
Interview with Saudi Businessman