Transformation in Saudi Arabia
The desert kingdom of Saudi Arabia is a rarity in the modern world, an absolute monarchy
whose laws are based upon interpretations of a religious text, the Qur’an, the holy book of Islam.
Despite Saudi Arabia's adherence to an archaic form of government, the Saudi economy has
historically performed well, primarily due to the country’s position as the world’s largest oil exporter.
In 2017, the country’s GDP per capita on a purchasing power parity basis was $54,500, not far behind
the $59,800 GDP per capita of the United States. The oil sector accounts for around 87 percent of
government revenues, 42 percent of GDP, and 90 percent of export earnings. In times of high oil
prices, the Saudi government has used oil revenues to finance a sprawling government apparatus and
to subsidize energy prices, which are among the lowest in the world. In 2014, however, oil prices
collapsed, wiping out an annual government surplus. In 2014, the government deficit ballooned to 15
percent of GDP, and it hit 20 percent of GDP in 2016, forcing the country to issue more debt and draw
down its foreign exchange reserves. Higher oil prices improved the situation in 2017 and 2018, but
the crisis exposed the vulnerability of Saudi Arabia to a fall in oil prices.
To compound matters, Saudi Arabia has a young population—some 70 percent of the
population is under the age of 30—and unemployment is high at 12 percent, a combination of factors
that many see as a recipe for social unrest. The high unemployment reflects the fact that while there
are jobs available outside of the government sector, most of them are taken by low-paid foreign
workers, who account for 80 percent of the labor force.
Following the death of his brother, in January 2015 Salman bin Abd al-Aziz Al Saud became
King. Breaking with tradition, the aging King quickly devolved substantial power to his son, crown
prince Muhammad bin Salman (commonly known as “MBS”). The young crown prince articulated a
different vision for Saudi Arabia. Known as Vision 2030, this calls for reducing the kingdom’s
dependence on oil revenues, privatizing the state-owned oil company Saudi Aramco, cutting energy
and water subsidies, growing the private sector, investing $500 billion in a new city called NEOM that
will serve as a hub for private and foreign investment, and introducing a valueadded tax in order to
close the government deficit. At the same time, the crown prince is seeking to loosen the stifling
moral codes that have limited cultural life and to promote a “moderate Islam open to the world and all
religions.”
Not surprisingly, this vision has met with resistance, particularly from members of the
sprawling royal family and conservative clergy who have benefited from the status quo. To counter
this, the crown prince consolidated his power, removing members of the royal family that disagreed
with him and putting his allies in positions of power. This culminated in an unprecedented shake-up in
November 2017 when scores of people, including some of the most powerful princes in the kingdom,
were arrested in a massive anticorruption sweep and jailed in, of all places, Riyadh’s opulent Ritz
Carlton. Whether this power grab will help the crown prince achieve his goals for Saudi Arabia
remains to be seen. The government has had to backtrack on plans to reduce subsidies after strong
resistance from the population, but it did introduce a 5 percent value-added tax in January 2018. Plans
for the privatization of Saudi Aramco are under way, and the government budget deficit has been cut
in half since 2015—although stronger oil prices have had a lot to do with that. Some of the stricter
laws have also been relaxed. Women are now allowed to drive, and some banned cultural
entertainments once seen as decadent, including going to the cinema, are now allowed. In the long run
though, transforming the Saudi economy will require growth in the non-oil private sector, and that is a
challenging task.
Moreover, a scandal surrounding the murder of Washington Post journalist Jamal Khoshoggi by
Saudi operatives in Turkey in October 2018 has at the very least potentially weakened the power of
the crown prince. Khoshoggi, a Saudi citizen and U.S. resident, was a critic of the Saudi regime.
Although the Saudi government has claimed that his killing was the result of a rogue operation gone
wrong, few believe that narrative. Many critics suspect that Muhammad bin Salman was aware of
plans to arrest Khoshoggi. Indeed, there is growing evidence that, back in 2017, MBS authorized a
secret campaign to silence dissenters, which included the surveillance, kidnapping, detention, and
torture of Saudi citizens. Khoshoggi was just the highest-profile case in that operation.
In the wake of Khoshoggi’s murder, some foreign investors have reconsidered their ties with
the kingdom, and there is little doubt that the fallout from the scandal has made it more difficult for
the Saudis to attract foreign investment.
Questions:
1. What long-term economic and political problems does Saudi Arabia face?
2. How might the reforms proposed by Muhammad bin Salman potentially address these
problems? Who might object and push back against them?
3. What are the potential benefits to Saudi Arabia of privatizing Saudi Aramco?
4. Is it morally correct for international businesses to invest in a country that denies basic rights
to women?
