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2016-02-11 18:50:00



"The GCC governments and peoples should realize that the boom period is over. We must all get used to a certain type of lifestyle that does not rely entirely on the state," Saudi Arabia's ruler warned.

"The upcoming period needs the private sector to assume part of the responsibility which has up until now been carried by the state," he told his fellow leaders from the six Gulf Cooperation Council countries.

The words could have come from Deputy Crown Prince Mohammed bin Salman, who spoke about the need for economic reform in a lengthy interview with the Economist newspaper on Jan. 4, 2016.

In fact they were spoken almost two decades earlier by Crown Prince Abdullah, the kingdom's de facto regent, at the Gulf Cooperation Council summit held in Abu Dhabi on Dec. 8, 1998.

The 19th GCC summit took place amid the last great slump in oil prices, when crude had fallen to just $10 per barrel, worth around $14 today after adjusting for inflation.

Oil prices, never very high in the 1990s, had almost halved over the previous 12 months after OPEC miscalculated demand for its oil and raised production despite the Asian financial crisis.

There are important differences between the price crisis in 1998 and the price crisis in 2016, not least that the former was triggered by a slump in demand while the latter stemmed from rising supply.

But the similar rhetoric employed in 1998 and 2016 is a reminder that efforts at political, social and economic reform in Saudi Arabia have waxed and waned with oil revenues.


Oil revenues have been fundamental in shaping the modern state and economy of Saudi Arabia, according to Steffen Hertog at the London School of Economics.

The fiscal autonomy provided by immense oil revenues gave a handful of senior princes the freedom to create and mould the modern Saudi between the 1950s and 1980s.

"Decisions were taken in a top-down fashion but often resulted in the oil-funded recruitment of many clients into the growing state apparatus, not least to co-opt and control society - essentially exchanging jobs and state services for political quiescence," according to Hertog.

Distribution of oil revenues became the most important organizing characteristic of Saudi Arabia's economy, society and the state.

Declining oil revenues as in the late 1990s and again in the mid-2010s have presented the most serious challenge to the political, social and economic order of the kingdom, intensifying the pressure for change.

But the distribution of oil revenues is so deeply engrained in the system that attempts to reform the administration and diversify the economy have been repeatedly frustrated.

Almost everyone in the kingdom, from the top rulers down, as well as observers outside it, recognizes the need for reform to create a more sustainable state and economy in the long term.

The challenge is how to manage the transition to a more diversified, dynamic and recognizably modern system, without sparking a crisis in the process.

The most dangerous moment for any government is when it takes its first step towards reform, as the historian Alexis de Tocqueville observed about pre-revolutionary France.

Saudi Arabia's rulers have recognized for more than two decades the need to diversify the economy, curb patronage and corruption, build a more dynamic private sector, and find productive employment for more young Saudis.

The problem is that when oil prices are low the revenues needed to accomplish the transition are scarce and the difficulties can appear daunting. When oil prices rise, it has been easier to postpone difficult decisions.

The ageing Abdullah, who ruled until 2015, is often now portrayed as having been an obstacle to change, but it is important to remember that in the 1990s and early 2000s he was seen as a cautious reformer.

The obstacles to economic, social and administrative reform in Saudi Arabia are deep-rooted and structural rather than arising from the choices of the top personnel.


The structural problems are vital to remember when evaluating the prospects for economic and other changes under King Salman and his dynamic son and deputy crown prince, Mohammed bin Salman.

The deputy crown prince has amassed unusual control over much of the kingdom's foreign and economic policy, and restructured large parts of the top administration.

There are reported to be so many consultants working in Riyadh for the deputy crown prince they have been nicknamed "the Ministry of McKinsey".

But the underlying problems that have frustrated reform efforts for the past 20 years, and arguably for the last 40 years, have not gone away.

In some ways, the kingdom's prospects for economic reform are brighter than before, not least because after a long period of high oil prices it has the financial resources to make some strategic investments.

Foreign reserves were reported at $635 billion at the end of November, according to the International Monetary Fund, down from over $735 billion at their peak, but much higher than in the late 1990s, when reserves had been depleted after more than a decade of low prices.

Saudi Arabia's current reformist leader is younger and has more access to professional help from Western experts on change management than the already ageing leaders in the late 1990s.

But the reserves will last only so long and are already pledged to defend the riyal's fixed exchange rate against the U.S. dollar and maintain current expenditure to avert a deep and destabilizing recession.

In other respects, the challenges remain the same or have become harder. The population is still growing rapidly and more Saudis are reaching working age.

Efforts to diversify the economy have failed over the last 20 years. Dependence on oil export revenues actually increased during the oil boom, according to the United Nations Conference on Trade and Development.

Oil exports accounted for 87 percent of all merchandise export earnings in 2012/13 and 46 percent of gross domestic product.

Given how much of the rest of the economy is dependent on patronage and providing goods and services to the oil sector, the true state of oil dependence is even higher than the official figures suggest.

No one should underestimate the determination of Saudi Arabia's new rulers to overhaul the kingdom's economy, but the immense challenges should not be underestimated either.














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