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On November 7, 2018, Karen Young, an AEI member, participated in the Hoover Institution panel entitled "Saudi Arabia in Crisis". The panel was led by Samuel Tadros from the Hoover Institution and included Elliot Abrams from the Council on Foreign Relations and Simon Henderson from the Washington Institute. Mr. Young's remarks and comments are presented below. A recording of the event can be viewed here.
It is assumed in Washington that Saudi Arabia is in crisis. US-Saudi bilateral relations are shaken, but the indignation sparked by the murder of Jamal Khashoggi has also infiltrated Saudi domestic politics, not as a result of political upheaval or disruption. 39, a direct threat against the crown prince, but a growing awareness on the part of the government. the king that citizens need to be reassured. The King and the Crown Prince are currently on a "listening tour" of the country and meet the citizens at traditional receptions. Like the United States, Saudi Arabia's domestic policy is undergoing major changes, under the impact of demographic changes, economic challenges and an attempt to redefine the country's economy. 39, national identity. This is not very different from some of the challenges facing the Americans. People are worried about jobs, competition and the role of their country in international peace and security.
As we retreat, Saudi Arabia has opened up and engaged in military intervention in Yemen, in an aggressive foreign policy towards its neighbor, Qatar, and in efforts to liberalize its economy, both as a destination for foreign investment and as an outside source. placed international capital for new technologies. The assassination of Khashoggi and the public outrage put Saudi Arabia and its crown prince on the carpet. Saudi Arabia is in a defensive position.
The media attention that followed swelled Saudi Arabia's global economic situation and probably the nature of its ties with the United States. Saudi Arabia is undoubtedly an important partner in the Middle East for the United States. We have very important economic ties, especially since the Saudi government is a major investor in US debt securities, both debt and equity. Saudi Arabia and its sovereign fund, the FIP, are also investing more and more in US technology companies and in global capital invested in downstream energy infrastructure and products.
But the reasons the United States maintains its close ties with Saudi Arabia further reflect Saudi Arabia's political leadership in the region, its impact on oil markets and the impact of its economic stability on Saudi Arabia. whole MENA region. With respect to US corporate interests (and wider US economic interests) in Saudi Arabia, these are more limited. Yes, Saudi Arabia has provided lucrative commitments for consulting firms and investment banks. (Saudi Arabia and its GCC neighbors now account for about 25% of emerging market bond issues over the past two years, including $ 144 billion.) Yes, Saudi Arabia is an important market for defense sales. However, these are some industries among many; Saudi Arabia does not have the ability to significantly change the financial stability of the United States.
We should be looking at Saudi Arabia for its role in the Middle East, as a development finance agent (which I have described here), as a partner in the global energy supply, as a source of funds for the poorest countries and as a political factor. the force against Iran. Mohamed bin Salman can be part of it, but his success or failure depends more on his constituency, his ability to generate and maintain loyalty, and his father's approval.
This leads to the evaluation of its main national program: Economic Reform and Vision 2030 Development Plan. These plans include: reducing subsidies on energy wastage, creating alternative sources of income for the government through royalty structures and a 5% value-added tax, efforts to attract foreign direct investment and the Public Investment Fund, which attracts and stimulates national economic growth . The agenda aims to address the main vulnerabilities of the Saudi political economy: a labor market divided between nationals and foreigners, unable to provide jobs and social inclusion to young people, with a heavy reliance on oil revenues for all economic activities and state spending, and an incalable trajectory, both politically and economically.
We should focus on the 10 million Saudis under 35 who, in twenty years, will face retirement (if they actually find work). The decline in birth rates, a side effect of women's economic inclusion and cultural changes, means that there will be no decline in births. new generation to support the current youth bulge as it ages. They risk becoming a lost generation; unemployed, which is part of the burden of public health (because many are at risk of diabetes and poor health), and are left behind by global growth. A 2013 study found that US $ 1 out of every $ 11 spent by the Ministry of Health was spent on diabetes care in Saudi Arabia. This is the generation of the Crown Prince. While he consolidates power and his father skillfully eliminates old institutions of informal consensus, Mohamed bin Salman accepts this demographic factor as a challenge to his governance. A kind of economic transformation must take place.
At present, the reform agenda has faced significant challenges, in part because of capital flight and the stagnant business climate. Much of the market anxiety is logically linked to foreign policy choices and the consolidation of power through repression between business and royal elites, exacerbated by the scandal of Jamal Khashoggi's murder. Authoritarian regimes flourish with elite accommodations; At the moment, Saudi Arabia is not very accommodating.
In the national economic agenda, the national processing program was further modified last week, after a first revision in 2017. Government spending on public sector benefits and wages was also maintained thanks to the costs. oil price this year. Indeed, the government spends more than ever, relies more on oil and uses capital spending as leverage for fiscal consolidation. This is a problem because investment spending has always been the main source of economic stimulus – major government infrastructure contracts, new megaprojects designed to stimulate economic growth. It does not really happen right now. Instead, debt financing continues to provide an increase in tax expenditures and does not target new growth projects, but the government's current employment and benefit commitments.
The reduction of the NTP corresponds to the objectives set: 433 initiatives by 2020, based on 37 strategic objectives, against 543 initiatives and 178 strategic objectives announced for 2016. It is in a way a recognition of the human capital and the capacity This is also a recognition of the fact that some of the targets were not achievable, particularly for job creation. With regard to women's participation in the labor market, the target is now 25%, compared to 30% in 2016 and 28% in 2017. At present, the participation rate of women in Saudi Arabia is around 20%. For Saudi men, the activity rate is about 62%. This means that Saudi women employed in the labor market are in fact quite limited and that dual – earner families will play an important role in reducing state dependence with respect to women and men. benefits and benefits related to employment. Public sector salaries are still more than 50% higher than those in the private sector, with an average of 11,000 SAR / month and 7,000 SAR / month in the private sector. Another revision of the NTP includes a new focus on the provision of health care and privatization of hospitals and the likely introduction of private insurance plans.
The rise in oil prices has essentially masked and supported the increase in spending on payroll, benefits and military spending. This is the legacy of Saudi tax policy that has not changed, but which is only rooted under the leadership of Mohamed bin Salman. According to Barclay's research analysis, the recovery in oil prices in 2018 resulted in an increase in oil revenues of about 85 billion SAR (22.6 billion USD) in the first half of 2018, which offset the increases of SAR 47 billion (USD 12.5 billion) in salaries and SAR 21 billion (USD 5.6 billion). bn) social benefits. Military spending increased by about 30 billion SAR ($ 8 billion) in 2018.
Where will we also increase oil revenues? They will directly support the FIP in its frenetic spending. There is a lot of reorientation of revenue in government funds, which highlights national spending priorities for citizens and feeds the growth of the FIP. Despite the issuance of new debt in September, foreign reserve assets decreased, reflecting the reallocation of resources from debt issues in other jurisdictions. Meanwhile, Saudi policies are creating a departure for expatriate workers, but the Saudis do not necessarily play these roles. In fact, the unemployment rate of Saudi nationals is not improving. Women are more actively looking for work, but not at the pace indicated initially or planned by the NTP. The unemployment target also rose from 10% to 9.5% in the first version of the NTP to 10.5% by 2020, according to the latest labor market update from Jadwa Investment.
More than the adventurist foreign policy or the aggressive repression of dissidents or national and foreign critics, Saudi Arabia needs effective financial governance, a social policy focused on the challenges of health and education, and imaginative job creation. There is money to spend, but not at these rates and not for long periods, especially if this generation wants to achieve its goals.
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