The Book Overview

The Saudi Arabian Economy: Policies, Achievements and Challenges

Mohamed A. Ramady, “The Saudi Arabian Economy: Policies, Achievements and Challenges.” Springer, USA 2005. ISBN 0-387-24833-1.

   With the current price of oil steadily increasing past 60 dollars a barrel over the past few months and the recent succession of Crown Prince Abdallah to the throne, Saudi Arabia has been once again been propelled into the lime-light. What transpires in the Kingdom, and the policies it takes concerning internal economic and social reforms, as well as its energy policies have a bearing far beyond its shores. As such , any  serious effort at understanding the country’s  internal  economic structure and the direction of change should be  welcomed, especially when  there is a paucity of  first class  research emanating from those who  have first hand experience  on the Kingdom.

    Many books have been written on Saudi Arabia in recent times, ranging from personal anecdotes about life in the desert Kingdom, to more serious scholarly work, mostly by researchers outside Saudi Arabia. The latter are often hampered by their inability to obtain first hand data and carry out field research, and more often than not, tend to dwell on issues of internal stability and political dissent.

   The  Saudi Arabian Economy  by Dr Mohamed Ramady  provides a clear exposition of the recent economic history of the Kingdom and  is a welcome addition to those with a serious interest in the workings of the Saudi Arabian economy, bringing a fresh perspective in some key areas such as the workings of the Saudi Arabian Monetary Agency, the Saudi capital markets, the problem of a growing unemployment and the globalization challenges facing the Kingdom. The author combines an academic as well as a professional 20 year banking career with international financial institutions, spanning Europe and the Middle East, particularly Saudi Arabia. He brings this experience to bear in the chapters of most interest to this magazine’s readers .While the book is intended as a reference source for senior level university students, it is also aimed at the general reader and practitioners interested in Saudi Arabia. Several inter-related themes are explored, with each theme grouping particular chapters that can be read in isolation depending on the readers’ interest.

   The first theme examines the efficiency of Saudi economic planning and its current evolution and  whether it had managed to lay the framework for meeting future challenges. The earlier strategic economic decisions are examined, the consequences which are still apparent today in the form of a capital intensive infrastructure and manufacturing base, the continuing reliance on subsidies and incentives to promote economic growth and the issue of foreign labor reliance, despite stop-go measures and so-called “Saudization”.

   The author analyzes the inherent weakness of the Saudi budgetary framework, with recurrent deficits and a ballooning of internal debt- around 90% of  Gross Domestic Product (GDP). The centrality of oil income in economic growth and the urgent need to diversify Saudi Arabia’s sources of revenues, including taxation, are explored in depth. If the introductory pages suggest a softer Saudi “go-it-alone” approach, the analysis does not shy away from difficult subjects. Issues such as treatment of foreign labor and their eventual replacement by qualified Saudis are treated with a degree of urgency, if the policy of Saudization is to succeed. This could become one of the most contentious issues in the years ahead. Most books on the Saudi economy have tended to discuss the matter in  purely statistical terms. They have neglected to delve more deeply, beyond the numbers, to assess the potential economic implications should the policy of Saudization be mishandled. The warning signs are already there, if one examines the number of Saudi companies that have moved their operations to more labor policy friendly Gulf countries.

   It is the chapters that examine the evolving, and in some respects, mature financial sector of Saudi Arabia that stand out in the book.  The Saudi Arabian Monetary Agency’s  (SAMA) use of sophisticated monetary instruments such as repos and reverse- repos in the absence of more traditional central bank policy tools such as discount and interest rate instruments are analyzed, as well as SAMA’s smooth transition of the Kingdom’s foreign bank presence to joint partnerships by the mid-1980’s.  Today SAMA is a fully fledged Central Bank  all  but in name, and supervises  a domestic banking system  that is  one of the most capitalized, liquid and profitable in the world. The author considers the rationale of SAMA’s fixed exchange rate policy for the Saudi Riyal and the Kingdom’s unique money supply creation process, as well as the challenges facing SAMA as a new wave of foreign banks are entering the Saudi market in the globalization era and impending Saudi entry to the World Trade Organization (WTO). The author, probably rightly, foresees a  strong emergence of Islamic financial services and banking restructuring by the Saudi banks, as a counterweight to the  entry of  the larger capitalized and  investment banking orientated  foreign banks. He argues that Saudi consumers will benefit from a healthy dose of competition and examines the relatively oligopolistic Saudi commercial banking structure in depth.

   The Saudi capital markets are extensively discussed, including the operating regulatory framework and various obstacles to an economically efficient market. The issue of ownership concentration and lack of depth of the largest Arab stock market is analyzed and recommendations are made to widen the market base. Throughout, the book emphasizes the growing importance of the Saudi private sector as being at the heart of the Kingdom’s revenue generation, economic diversification and value added job generation if future challenges are to be met. The role of the family businesses is explored, as well as the growing and effective contribution of the Saudi women in economic development, despite continuing obstacles to their effective participation. Throughout the book, the author argues for more effective women role in the national economy and allowing them wider participation.

  The issue of “Saudization” and the growing problem of youth unemployment are researched as well as calculating the impact of such unemployment to the Saudi economy. Based on his own research, the author estimates that unemployment is currently costing the Saudi economy a loss of around SR60 billion in GDP output per annum. This is based on a conservative estimate of male only unemployment levels of 15 % . The author warns that, with  70% of the population under 30 years , and the growing influx of  males and   females to the labor market , it is not too unrealistic to   forecast  Saudi unemployment at the 50 % levels within  the next ten years,  if  the economic base is not widened  and private sector diversification does not grow at the same pace . One of the first acts of King Abdullah was to announce further effective job creation measures for Saudi youth.

   Further chapters look at the Saudi energy, petrochemical and mining sectors, and explore Saudi Arabia’s energy relationship with the wider world. The record oil prices of 2004 and 2005 only served to underscore the Kingdom’s importance as the major excess capacity producer of the world, but past history has shown that Saudi Arabia cannot rely on temporary oil price fluctuations, and the author urges for fundamental economic structural reforms, and believes that higher oil prices and revenue windfalls only cause the momentum for structural economic reforms to falter and be delayed. Strategic policies such as Foreign Direct Investment (FDI), privatization and the need to adapt for possible WTO entry are examined in depth, and the author is particularly harsh on the results obtained to date on all three fronts. Foreign Direct Investment has been selective, capital intensive and concentrated on a few energy related sectors. The Small and Medium sized Enterprises or SME’s , have been hardly affected , and it  is only belatedly  that the Saudi government has  introduced financial and administrative measures to help the SME sector. As the author points out, every SR 1 million invested in the capital intensive industries creates around 3 new jobs, but a similar amount creates around 20 jobs  in the SME sector. It is no wonder that the Saudi government will concentrate its efforts in the near future in this area. 

   The transfer of appropriate technology to the Kingdom has always been of major importance, either through joint venture FDI or through the so-called Saudi Economic Offset Program. The author examines in detail the rationale of the offset program and the limited success it has had to date in generating a critical mass of industries  and employment generation; although some success has been achieved in the transfer of “high-technology” packaged skills that the Kingdom lacked. The author establishes some benchmark guidelines to measure the level of technology packaging and transfer which can be applied to the nearby Gulf countries, and goes on to make a comprehensive comparison of technology transfer for those companies operating under the Offset Programs and those that created foreign joint ventures outside the Offset Program. The results indicated a stronger employment generation bias in the non-offset investments, but the level of technology packaging was lower. 

  The book  concludes by examining the potential costs and benefits of WTO entry and globalization threats to the private sector and the need for quality education reform to meet globalization challenges. The ability of any society to produce, select, adopt and commercialize knowledge is critical for sustained economic growth and improved living standards. In this, Saudi Arabia has so far lacked behind other developing nations in relation to its population, size and undoubted quantitative educational investment. What Saudi Arabia has also experienced over the past three decades, is a gradual erosion of  the sense of well being of its  middle classes and other professional  segments of society as measured by GDP per capita which is now one of the lowest in the Gulf. The author argues strongly  that, for an effective economic “ take-off “ to take place,  the necessity of  the re-emergence and strengthening of the middle and professional classes is paramount.  A  meaningful stake in society is also crucial , and the small steps taken in the recent Saudi  municipal elections,  whatever their shortfall, is a positive  beginning in this process.

    The book also explores Saudi Arabia’s multi-faceted relationship with the other five members of the Gulf Cooperation Council (GCC), as developments within the GCC could have far reaching economic and social consequences for the member states. The author examines how far similarities and differences between the GCC states could accelerate or impede their planned full monetary and customs union by 2010, with special attention paid to capital market reforms and economic liberalization as means for further GCC integration. Reform, although implemented gradually, can be cumulative in effect. Gradual change may seem slow or less impressive to those outside the Kingdom, and compared to fast paced developments of other Gulf countries, but the author argues that in the case of Saudi Arabia if reforms are to succeed and be effective they have to respond to the needs, customs and mores of all society. Consensual change will be the means of change for Saudi Arabia. If the first action of the newly appointed King Abdallah is anything to go by, the author has truly put his finger on the pulse of how Saudi Arabia is evolving and facing its future challenges. 

   The writing is fluid, easy to understand and uses a great deal of illustrations and personal examples, as well as end of chapter summaries and one of the most comprehensive and up to date reference bibliographies on Saudi Arabia.

To obtain the “Saudi Arabian Economy” please click on Distributors or visit the publisher Springer on www.springeronline.com  or through www.amazon.com.

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