New Saudi push toward industrialization

The NYT reports that Saudi Arabia is pushing forward with a $500 billion investment to construct six futuristic cities meant to become the country’s 21st century industrial hubs. According to the plan championed by King Abdullah, these steel-and-glass cities currently under construction will emerge as leading manufacturers and exporters of products ranging from plastics to cell phones. The stated purpose is to diversify the Saudi economy away from oil and to combat youth unemployment propelled by the rapid population growth.

Indeed, the Saudi population, now at about 24.5 million, is predicted to reach nearly 40 million by 2025. Creating enough jobs to incorporate all of the new entrants into the labor force is an urgent necessity. But is building new industrial cities really the answer? The Saudi Arabian General Investment Authority estimates that they will add $150 billion to the Saudi GDP by 2020 and create one million new jobs. Yet skepticism toward their ability to address the unemployment crisis is warranted.

First, the continued expansion of the Saudi economy is very much dependent on high prices of oil. They in turn fuel inflation, which reached the highest rate in over a decade (6.5%) last month, making even staple foods such as rice or milk hard to afford for ordinary Saudis. In order to quell growing public discontent, wages are being driven up. Saudi government employees are expected to receive a 30% salary increase and some private companies already declared pay hikes of up to 40% in an attempt to balance the steep rise in consumer prices. This calls the international price competitiveness of the envisioned Saudi industrial expansion into question.

Second, it is not clear that creating even one million new jobs through this top-down industrialization will alleviate the country’s demographic pressures, given that by 2025 the population will soar by over 15 million. What is more, nearly 7 million people living in Saudi Arabia are expatriate workers who account for most of the existing private sector employment, while native Saudis prefer to queue up for high-paying government jobs. Average unemployment rate in Saudi Arabia in 2002 was 5.3 percent, but only 0.8 percent among expatriate workers as compared to 9.7 percent among nationals. This suggests that the bulk of job creation in the new industrial cities might also go to foreigners rather than nationals who may be unwilling or not qualified to fill the new posts. Already today the people building these new industrial hubs are by and large not Saudis, but migrant workers from China, India, and Turkey.

Third, these massive investments in physical infrastructure are not accompanied by an equal attention to improving the Saudi institutional infrastructure. The 2007 Corruption Perception Index gives Saudi Arabia a low score or 3.4 (0 indicates highly corrupt, 10 highly clean) and its score on Voice and Accountability in the Worldwide Governance Indicators is dismally low: in the bottom 10th percentile globally. In the absence of political freedoms, economic freedoms are also out of reach, especially for women who cannot participate in the economy on equal terms, and migrant workers who are entirely at the mercy of their employers and lack legal protection.

Industrialization does not equal institutional reforms. And only institutional reforms that would level the playing field for all market participants and enhance transparency, accountability, and the rule of law can bring about greater diversification of the Saudi economy, sustained growth, and job creation. Meanwhile, both the economic and political power in the Kingdom remains very much concentrated among the royal family and a small elite class and the new industrial hubs are not going to change that.

Published Date: January 28, 2008