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INFORMATION
AND INSIGHTS ON MIDDLE EAST DEVELOPMENTS
THE NATIONAL COUNCIL ON U.S.-ARAB RELATIONS
AND
THE U.S.-GCC CORPORATE COOPERATION COMMITTEE
WEEK OF
MAY 14, 2001
TABLE OF CONTENTS
* Publisher's Note
* PERSPECTIVES ON OPPORTUNITIES &
CONSTRAINTS IN SAUDI ARABIAN
ECONOMIC DEVELOPMENT by Mr. Brad
Bourland
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PUBLISHER'S NOTE
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For this week's
"Perspectives" piece, Gulf Wire is pleased to present
an
essay by Brad Bourland, a renowned analyst of the Saudi Arabian
economy. As
chief economist for the Saudi
American Bank (SAMBA), Mr. Bourland is in
regular contact with a broad spectrum of the Kingdom's top
economic
planning and financial officials.
The two of us recently participated in "The First
International Conference
for Investment in the Al-Madinah Region" in Yanbu, Saudi
Arabia and
subsequently in an event sponsored by the American Business
Group of Riyadh
in conjunction with the 20th anniversary of CITICORP's equity
participation
with SAMBA. He offers herein his personal perspective on some of
the
dilemmas and most pressing issues confronting the country's
leaders as they
pursue a range of economic and commercial policy reforms en
route to
eventual entry into the World Trade Organization (WTO).
John Duke Anthony
Publisher, GulfWire
FOREWORD
Saudi Arabia ranks as
America's 20th largest trading partner. With 187
countries as members of the United Nations, and close to two
dozen more that are not, this places the Kingdom in a position
of considerable envy in the eyes of a great many other polities
that would welcome a chance to switch places.
There are additional ways
to appreciate the Kingdom's unique distinction
vis-a-vis other countries that also occupy a special niche among
America's
more prominent economic partners. One is to recognize that,
among the Arab
world's 22 member states, Saudi Arabia ranks first in terms of
trade with
the United States, first in terms of private American direct
investment, and first in number of American-Arab joint
commercial ventures. One can arrive at similar rankings of first
or second place in terms of where Saudi Arabia stands as an
economic and business partner of the United States in
comparison with 99% of the more than 50 African countries and
the 56 Islamic nations.
One of the reasons for the
positive bias that many Saudi Arabians have for
doing business with American companies has been a direct result
of the
formative influence on the education of thousands of the
Kingdom's citizens
that have studied in the United States. Indeed, it is often
pointed out that there are more American-trained Ph.D.s in the
Kingdom's Cabinet than there are Ph.D.s of any kind in the
United States Cabinet, Supreme Court, Senate, and House of
Representatives combined.
Such statistics are seldom
conveyed in studies that focus upon an array of
constants and changes in the Kingdom's overall economic
situation. Indeed,
few are the studies that highlight their relationship to the
country's
prospects for ongoing modernization and development amidst an
amalgam of
opportunities and constraints. Equally few are the analysts who
can
encapsulate analytically the primary forces and factors that
drive and
impede the mix of economic opportunities and constraints that
prevail in the country at any one moment in time. But such
individuals exist. The chief economist for Saudi American Bank
in Riyadh, Mr. Brad Bourland, is one such analyst who has as
good a grasp as any upon the working dynamics of the Kingdom's
contemporary economic situation.
In this special report, Mr.
Bourland offers his professional perspective on
some of the dilemmas and issues confronting Saudi Arabia's
leaders as they
pursue a range of economic and commercial policy reforms en
route to
eventual entry into the World Trade Organization (WTO). The
U.S.-GCC
Corporate Cooperation Committee is pleased to provide his
insights into some of the more pressing opportunities and
economic challenges that are being faced by investors in the
Kingdom over the near-term. The views expressed herein are his
own and not necessarily reflective of the Saudi American Bank or
of the U.S.-GCC Corporate Cooperation Committee and its
Secretariat, the National Council on U.S.-Arab Relations.
PERSPECTIVES ON OPPORTUNITIES & CONSTRAINTS IN SAUDI ARABIAN
ECONOMIC
DEVELOPMENT
by
Brad Bourland
Chief Economist, Saudi American
Bank
In the Middle East, as in most of the rest of the world,
political leaders
and the public are focusing their attention on how to improve
prosperity
and growth for rapidly expanding populations. The major
challenge for Middle East policymakers is to reverse the
region's gradual drift into relative economic insignificance.
Regional Economies in a Global Context
It is instructive to put the size and strength of the Arab
economies in a
global context. Saudi Arabia, with a population of 21 million
people and a
land mass one-third the size of the United States, has the
largest economy
in the Arab world. In 2000, Saudi Arabia's GDP was approximately
$170
billion. That represented about a 20 percent nominal GDP growth
over 1999
as a result of the increase in oil revenues.
But with all of its oil production and exports, its government
spending,
and all non-oil activity, such as banking and finance, the
Kingdom's economy remains smaller than the economy of the
Washington, DC, metropolitan area, which has a GDP of about $200
billion. In fact, it is smaller than any major U.S. or European
city.
The GDP of the United States, in contrast, is about $9 trillion,
while the
GDP of France and the United Kingdom are about $1.5 trillion.
Saudi
Arabia's $170 billion economy, therefore, despite being the
largest in the Middle East, is really quite small.
Real GDP growth for the past decade throughout the region,
moreover, has
been anemic – around 1 percent per year. That level of growth
is not enough
for Saudi Arabia's economy and it is not sufficient to keep up
with the
rest of the world.
The Region's Political Mantra: Job Creation
Not enough new jobs are being created for the large numbers of
youth
entering the labor market. It is estimated that, in Saudi
Arabia, one new
job is being created for each three Saudis that are entering the
labor
market. According to the Kingdom's latest five-year plan, over
the next
five years there will be about one million Saudis graduating
from high school.
About half of those graduates will go on to college and around
400,000 will
earn their degree. It is clear why the creation of jobs is the
political
mantra of the day, not only domestically in the Kingdom, but
throughout the
region.
The rest of the world is growing faster and prospering more,
while the
Middle Eastern economies' relative economic importance gradually
erodes.
Arab policymakers are aware of the problem of slow growth and
are striving
at a fairly aggressive pace to fix their economies. And they are
doing the
right things. They are liberalizing, opening up, attracting
foreign
investment, and participating in globalization.
The challenge for the U.S. policymaker is to encourage and help
Arab
policymakers to continue on the right economic path without
being
condescending in the process. The need for government and public
support
rather than hostility towards business is clear to U.S.
policymakers. In
the United States these policies have engendered unparalleled
prosperity. The premise that free and open markets yield
prosperity is not as obvious to policymakers in the Middle East.
To explore one aspect of globalization and its impact, let us
consider the
question of whether new technology creates more jobs than it
destroys. Arab
leaders, certainly GCC leaders, are embracing policies that will
enable
them to participate fully in globalization and free trade
because that is the only way to break out of their low growth
economic performance.
Economic studies show convincingly that countries with high
trade barriers
experience low growth. And it is clear that the Middle East over
the past
few decades has not participated fully in the growth in world
trade. Over
the past twenty years, global trade, as measured by total
imports
worldwide, grew 70 percent in the 1980s and over one hundred
percent in the 1990s. In the Middle East, on the other hand,
such trade declined by 3 percent in the 1980s and it grew by 40
percent in the 1990s. Overall, trade is now over 25 percent of
global GDP, up from 7 percent in the 1950s.
Job Creation and the Flexibility of Labor Displacement
The Middle East just has not participated in the benefits of
globalization
and has largely been left behind. To address this, Arab
countries are
lowering trade barriers and openly inviting the full importation
and use of
the latest technologies. Will the introduction of new technology
now create
more jobs than they destroy? In the United States, innovation
and
entrepreneurship in a technology economy clearly does create
more jobs than
it destroys. The jury is out for European and Asian economies,
and in the
Middle East, on balance, it is likely that jobs are being lost.
Modern economic theory points to the flexibility of labor
displacement –
the ease with which people can be employed and dismissed from
their job – as a key underlying variable. In the United
States, for both legal and cultural reasons, it is quite easy to
hire and fire. Probably more importantly, the new technology
entrepreneur is able to take hiring risks because, if his new
business does not prosper, he can, in comparison with his
counterparts in Europe, Asia, and certainly the Middle East,
quite easily lay off his workers.
A senior official at a software company in the Middle East
indicated that
companies installing internet-based systems for some of the
major GCC
state-owned oil companies have reduced the processing costs of a
typical
procurement from over a thousand dollars to less than ten cents.
In the
process, many jobs in those companies are being made obsolete.
At the same
time that these technology-driven productivity gains and worker
obsolescence are occurring in the economy, the Arab policymaker
is facing a separate demographic challenge in which job creation
is imperative.
The Saudi Arabian case profile is similar to that in many of the
Gulf
countries, in particular those which have had oil boom-induced
baby booms.
The Kingdom's males over thirty years old enjoy nearly full
employment, but
there are growing unemployment pressures for its citizens
between the ages
of 20 and 29.
Arab policymakers must decide how to deal with growing
unemployment at the
same time that new technologies are making jobs obsolete. The
natural
policy reaction is to place restrictions on firing and protect
existing jobs. In those Gulf countries that have large
expatriate worker populations, the response is also to introduce
restrictions on firing locals and mandates to replace foreign
expatriates with local workers.
These policies, of course, make labor displacement more rigid
and
difficult, and thus increase the likelihood that new technology
will destroy more jobs than it creates. This presents a dilemma.
Is a policymaker doing the right thing in pursuing 'Saudization'
in Saudi Arabia? Politically, he probably is. Economically,
however, he probably is not.
Momentum for Economic Change
The effort to adopt the right policy in the face of conflicting,
uncertain,
and sometimes counterintuitive and counterproductive results is
a clear
struggle in the Middle East today. Debate over the benefits of
membership
in the WTO is intense. Inviting foreign capital and investment,
dismantling
the web of preferences and protections for local businesses,
lowering
tariffs, and allowing exchange rates to float freely are just a
few of the
challenges facing policymakers today.
Nonetheless, despite this struggle, there is an impressive
momentum for
economic change and reform in the Arab world. For the most part,
Arab
policymakers are concluding that the answers to growth and
prosperity lie
in free market forces and full participation in globalization.
The free market answers are not as obviously beneficial as many
outsiders
see them, however, and they can introduce substantial economic
pain and
social dislocation. Free market prescriptions are valid for the
U.S.
policymaker, and they are being adopted. In the United States,
prosperity
and wealth creation cure many ills. They will in the Middle
East, as well.
High Oil Prices are not Leading to an Economic Boom
Oil prices today, in nominal dollar terms are at an all-time
high. However,
in inflation-adjusted terms, they are lower than the mid-to-late
1970s,
which helps explain why the high oil revenues that are being
experienced
this year are not yet resulting in another boom in the economies
in the
Middle East. The non-oil private sector in Saudi Arabia, for
example, is
expected to grow 3 to 5 percent, which compares quite favorably
with the 1
percent growth that was experienced before, but it does not
represent a
boom, by any means.
The result is that Arab policymakers, with this dilemma in mind
and
struggling to stimulate faster domestic growth, are going
against the
conventional wisdom of encouraging higher oil prices and turning
instead to
economic reform.
There really are two employment issues in the Kingdom and
throughout the
Gulf. One is a scarcity of jobs and the other is a shortage of
skills. The
private sector in Saudi Arabia is creating about 35,000 jobs a
year,
whereas about 100,000 Saudis a year are entering the job market.
The implications for policymakers arising from the fact that
there is about one job for each three Saudis seeking employment
are self-evident. On the other hand, highly skilled Saudis are
able to obtain jobs.
There are seven universities in the Kingdom, four of which are
Islamic.
About 50 percent of the graduates from Saudi universities have
earned
degrees in Islamic-related studies. Historically, they have not
been well
prepared for the labor force.
There is a growing business in private sector technical
education, however.
And the new five-year-plan has placed a strong emphasis on
shifting the
curriculum so that Saudis can develop job skills. It will take
some time to
correct this problem, but there is a move in that direction
WTO Accession and Economic Reform: The Prospects
Some assert that the nature and extent of economic reforms
necessary for
the Kingdom to gain admission to the WTO will take years to have
some
structural effect and probably would have limited or no
macroeconomic effect. Whether this is a fair observation or not
remains to be seen.
If Saudi Arabia intensively pursues all of the economic reforms
that Crown
Prince Abdallah is spearheading – such as changing the
economic and legal
infrastructure, for example, and joining the WTO – about ˝
percent will be
added to real GDP growth per year until it reaches a sustainable
6 percent
per year. That would be a good organic growth rate for Saudi
Arabia. But
there should be no illusions here: it will take some time to
achieve this,
and, for policymakers and policy implementers alike, it
represents a very
difficult challenge.
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National Council on U.S.-Arab Relations
President and CEO: Dr. John Duke Anthony
U.S.-GCC Corporate
Cooperation Committee
Secretary: Dr. John Duke Anthony
1140 Connecticut Avenue, NW
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Tel: 202.293.0801
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PATRICK W. RYAN
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