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Saudi Arabia's impetus to change grows as it dreams of new riches beyond oil

07-06-2009 8:33 pm

By William Green

Deep in the Arabian desert, hundreds of guests celebrate the birth of a city.

The Saudi government has flown them in to the northern city of Hail, then bused them under police escort to a giant marquee in the sand with a red carpet out front.

Inside, the walls are adorned with artists' renditions of Prince Abdulaziz bin Mousaed Economic City, which the government says will be home to 300 000 people when built.

After prayers and speeches, the audience sips tea and plucks chocolates off silver trays while a film on the city offers a vision of the future: skyscrapers, science labs and classrooms of kids with laptops.

Oil is no longer enough for Saudi Arabia, Opec's largest producer of the black gold.

Since 1975 its population has more than tripled to 25 million people from 7.3 million - and 57 percent of all Saudis are under the age of 25. As the population grows, the kingdom's riches must be spread further. Last year, gross domestic product (GDP) per capita was less than $19 000 (R153 274), compared with $47 000 in the US and $103 000 in Qatar.

To create jobs for its citizenry, the government wants to build cities and diversify into new industries.

"The impetus to change has grown as the population has grown," says Howard Handy, the chief economist at Samba Financial Group, a Riyadh-based bank. "They are very focused on how to find work for all these young people."

The proposed economic city - 720km north of Riyadh - is one of four new metropolises that Saudi Arabia is planning in order to help create more than 1 million jobs by 2020.

"Their dream is to become a major industrial power beyond oil," says Jean-Francois Seznec of the centre for contemporary Arab studies at Georgetown University. The Saudis are focusing on energy-hungry industries like plastics, petrochemicals, aluminium and steel.

Risky neighbourhood

The success - or failure - of Saudi Arabia's plans could affect the stability of the whole region, which supplies the world with much of its oil and has also been a breeding ground for terrorists.

"It's a very big, populous country in a risky neighbourhood," Handy says. "It's the holder of a tremendous amount of oil resources that are of great importance to the global economy. So everybody has an interest in its political future and the development of its economy."

Recognising this strategic significance, US President Barack Obama visited King Abdullah in Riyadh on Wednesday to discuss such issues as peace in the Middle East, terrorism and the price of oil.

Obama had said he intended to tell the king that "huge spikes" in energy prices would hurt the interests of both the US and Saudi Arabia.

Sitting on nearly a quarter of the world's known oil reserves, the kingdom can afford lavish dreams. As crude oil surged to a peak of $147 a barrel last July, the state-owned oil and gas company, Saudi Aramco, generated as much as $1 billion a day in revenue.

The Saudi Arabian Monetary Agency - the nation's central bank - built up its holdings of foreign assets such as bonds and currencies to $546bn last October from $98bn in 2003.

Saudi Arabia's total 2008 GDP of $482bn dwarfed that of every other Middle Eastern nation.

For all of its wealth, Saudi Arabia has felt the effects of the global economic crisis as oil tumbled to $34 a barrel in December before rising to $68 this week.

The four-city project is a scaled-back version of the original plan for six new urban centres. With banks and investors avoiding risk, more than $60bn of projects have been cancelled or delayed, Handy says.

The decline in oil prices and a 71 percent plunge in the nation's Tadawul all share index since its February 2006 peak have shaken confidence.

Handy expects GDP to shrink by 1.8 percent this year after growing 4.2 percent last year.

A modern economy

Until recently, most Saudis have not needed to hold jobs. The government provides free education and health care and levies no personal income tax.

An immigrant population of 6.5 million people performs almost all of the kingdom's menial tasks. In 2007 just 4 million Saudis worked, according to the Ministry of Economy and Planning.

Only a fraction of the labour force is female, in part because of constraints placed on women by the government's strict interpretation of Islam. They are not allowed to mix in public with men who are not related to them, for instance, and are prohibited from driving cars.

With the population growing, and inflation averaging 9.9 percent last year, there is an economic need for more women to hold jobs.

"Unless you're very wealthy in Saudi Arabia, you cannot maintain a comfortable standard of living without two incomes," says John Sfakianakis, the chief economist at SABB, a Riyadh-based bank. "That is compelling women to work."

Under its octogenarian ruler, King Abdullah bin Abdulaziz al-Saud, the country has been trying to modernise its economy. It wants to attract foreign investment - including $500bn for the new cities - and has opened up industries such as insurance that were previously off-limits to foreign firms.

In its 2009 Ease of Doing Business report the World Bank ranks Saudi Arabia 16th out of 181 countries, up from 67th in 2004. The kingdom attracted $24.3bn in foreign direct investment in 2007, according to the UN Conference on Trade and Development, compared with just $183 million in 2000.

Seznec says two big challenges remain: improving the quality of education and advancing the status of women in the workplace.

King Abdullah favours change, talking in a 2007 speech of the need to create a "culture of labour", for example. He also appointed a female deputy minister for girls' education in February, the highest government rank a Saudi woman has attained.

And he has authorised Saudi Aramco to create the country's first co-ed school, the King Abdullah University of Science and Technology, which will open in September.

The Saudi king and his ministers are "very logical and reasonable but are moving very slowly" says Sherifa Zuhur, a Middle East expert at the US Army War College's Strategic Studies Institute.

Saudi Arabia needs to prepare its youth for the workplace lest they become restive and more prone to terrorism, SABB's Sfakianakis says. "These young people need to be empowered," he says.

Though change seems slow to outsiders, Saudis are confident that the modernised society the country is striving for will become a concrete reality. - Bloomberg