August 11, 2018:
Mohammed bin Salman Abdulaziz Al Saud, the 32 year old son of the current king of Saudi Arabia, is seen as one of the brightest (he has a degree in law) of the top Saudi royals. He’s currently the deputy crown prince and, since January 2016, the youngest Minister of Defense ever. Mohammed bin Salman is ambitious and has proved himself capable of handling the Saudi bureaucracy. For the last four years, he has been working on a plan to move Saudi Arabia away from dependence on oil income. In April 2016 he announced that his plan has been accepted and he will implement it. That has turned out to be extremely difficult even though getting away from oil dependence is recognized as a matter of life or death because within 50-90 years the oil will be gone. This has been known since the 1970s and ever since the government has tried several plans to develop the non-oil side of the economy and none have worked. Currently, oil income is nearly half the GDP. Take away the oil income and most of the rest of the GDP disappears as well.
There are still elderly Saudis who remembered what life was like before the oil wealth began pouring in during the 1970s. When the kingdom was founded in the 1930s oil was just being discovered in Arabia. At that point, the economy was described as “subsistence” and per-person GDP was about half the world average. By 1950 per-person GDP was a little above the world average (the U.S. was nearly five times average). After OPEC (the oil cartel) was created in the early 1970s per-person GDP soon grew to three times the world average (U.S. was four times). That was the peak (in terms of per-person GDP) for the Saudis because all that sudden wealth sparked a population explosion. Saudi per-person GDP shrank to about twice the world average (which had doubled since 1950) in the 1980s (U.S. still four times). By 2013 Saudi per-person GDP was about at the world average and the population was still growing while oil income was not and there was not much growth at all in the non-oil part of the economy. Saudis noted that the U.S. was now nearly five times the world average in per-person GDP. And many countries with no oil, and that were as poor as the Saudis in the 1930s, are doing better than Saudi Arabia.
Mohammed bin Salman (or MBS for short) is seen as the last, best hope. But when you get into the details you see that known problems pile up faster than workable solutions. For example, he wants to have half of the Saudi military purchases to be made in Saudi Arabia by Saudi firms. Currently, Saudi Arabia has the third largest annual defense budget ($57 billion) and nearly all military equipment is imported. That is not going to change soon but the composition of the Saudi defense forces is because right now the Saudi military still depends on a lot of foreigners to do key jobs (technical and management.)
An example of why Saudi Arabia is so dependent on defense imports was seen in early 2016 when MBS was present when a munitions factory in Saudi Arabia was opened (but not yet in production). The facility was built by German-South African defense firm (Rheinmetall Denel) and it will produce artillery (60mm, 81mm and 120mm mortar and 105mm and 155mm howitzer) shells and aircraft bombs (of up to 909 kg/2,000 pounds). The new plant, financed by the Saudis and jointly run by them and Rheinmetall Denel can produce up to 300 artillery and 600 mortar shells a day. Apparently, most of the ammo is for the Saudi military although some may be exported. However, the Saudis tried this before, in the 1980s. Back then South Asian workers were used and quality control was poor. This was kept quiet until 1990 when during a skirmish with Iraq (on the Kuwaiti border) it was found that the Saudi built ammo was defective (the 90mm shells would not explode). The plant was quietly closed, the ammo produced there was discarded and replaced with ammo purchased from a European manufacturer.
Rheinmetall Denel has been told to avoid a repeat of the 1990s fiasco but the Saudis have been quietly informed that finding enough Saudis willing and able to do the exacting work has proved, as in the past, impossible. The munitions plans are still not in full production and never will be if it has to rely on a largely Saudi workforce. This is the essential problem throughout the economy although when it comes to manufacturing ammo it’s a matter of life or death.
MBS wants Saudis to work at skilled jobs and manage this new non-oil economy. He faces formidable challenges. The official Saudi Arabian unemployment rate is 12-13 percent but for a long time, the government tried to pretend that the unemployment rate for Saudis was less than half that. Another problem is that many Saudis seek “no show” jobs or are unemployed by choice. Saudi men tend to have a very high opinion of themselves, and most jobs available, even to poorly educated young men, do not satisfy. Thus most Saudi prefer a government job where the work is easy, the pay is good, the title is flattering and life is boring. In the non-government sector of the economy, 90 percent of the jobs in Saudi Arabia are handled by foreigners. These foreigners comprise 30 percent of the Saudi population, mostly to staff all the non-government jobs Saudi men disdain. While those foreign workers send over $20 billion home each year over 80 percent fill unskilled jobs. These unskilled workers do not make enough to bring their families to Saudi Arabia and over 90 percent of them spend less than six years working in Saudi Arabia. Basically taking a job in Saudi Arabia (or any other oil-rich Arabian state) is a way to make enough money to start a business or otherwise improve your life back home. The Saudis are fine with that.
This means most young Saudi men have few challenges. Past efforts to replace foreign workers with Saudis have failed in practice although many of these Saudi employees were declared a success because many foreigners were officially replaced with Saudis who were often so ineffective that companies had to find ways to hire foreigners to actually get the work done while Saudis were still on the payroll. Currently, about 80 percent of the non-government workforce is foreign-born. This includes most of the managers and skilled personnel. Since the 1990s the Saudis have made some progress because it used to be that 90 percent of the non-government workforce were foreign-born. The problem is not just the inability, or unwillingness, of Saudis to do many of these jobs but the fact that the foreigners are informally organized and resist reducing their numbers. Nearly all the foreign workers come from relatively poor nations with Moslem majority populations or large Moslem minorities. Most of these foreign workers are from South Asia (Pakistan, India, Bangladesh and Sri Lanka). Note that India has more Moslems than Pakistan and those Indian Moslems have made themselves indispensable when it comes to keeping the commercial sector going.
While oil accounts for 45 percent of the Saudi GDP, the rest is largely in private hands. There are few foreign owners but the Saudi owners would see their companies fall apart quickly if their foreign workers were gone. The Saudis depend on foreign entrepreneurs to obtain a steady supply of mainly poor, mainly unskilled and mainly Moslem workers to serve less than six years in Saudi Arabia to do the dirty work (according to Saudi standards) and keep things working. In 2012 the Saudis confronted the “suitability problem” and carefully examined it. They found that most Saudis consider about 86 percent of the jobs expatriates do as “unsuitable” for Saudis.
This made it clear that a major problem was the absence of a suitable work ethic among Saudis. Many Saudis openly complain about this and often blame the government for creating a culture of dependence to ensure the survival of the monarchy. As a result, foreign workers are much more effective, it’s as simple as that. This is in part a self-inflicted problem. Since all of the oil states in Arabia are monarchies, the rulers quickly found that the most effective way to remain in power was to keep their subjects pampered and happy. In other words, spread the oil money around and pay attention to public opinion. Most of the public backs the use of foreigners and the continued use of oil money to make life easy for the locals.
For example, foreign workers are brought in to handle most jobs (like training pilots and maintaining weapons) that require high skill levels, a lot of effort, and lots of experience. This importation of foreign experts for piloting warplanes and maintaining them is very common in the Arab oil nations because the locals tend to avoid heavy physical or mental labor. While many Arab men see being a fighter pilot as glamorous and worthy of some effort, the training required discourages most who attempt it. Some Gulf Arab states insist that Arabs occupy those fighter plane cockpits no matter what so the foreign trainers and maintainers are ordered to do what has to be done to keep the pilots alive and the planes in one piece. Pilot skill and capability has a lower priority. There are some exceptional Arab fighter pilots but “just getting by” is tolerated among the fighter pilot community. Yet due to these pilots being constantly exposed to ridicule by allied (Western) foreign the Saudi pilots got better. They established a subculture that was encouraged allied pilots who said nothing but once at the controls showed how it was done. Over decades similar exposure to competent fighters created a growing number of Saudis capable and willing to do jobs like maintaining warplanes and other high-tech military gear. Progress in this area is slow and as much as MBS and many other Saudis would like to speed it up no one has figured out how.
Another problem MBS is quietly trying to address is what Islamic conservatives have had control of the education system for decades in return for remaining loyal to the Saudi family. This meant emphasis was placed on religion and not literacy, math, science, critical thinking and anything seen as too Western. This placed Saudi students at all levels near the bottom of educational rankings when Saudi students took standardized tests. Saudi Arabia was not producing students who could handle many of the jobs they were importing Moslems from other countries to do. The other Gulf oil states, particularly the UAE, did a much better job and produced graduates who could more easily handle technology, business and managing a modern economy. Saudi parents were increasingly willing to pay for additional education for their children so they could qualify to attend a foreign university and become competitive. This was increasingly popular but backfired when a lot of the Saudis who got a Western education, especially those who went to college in the West, decided that Saudi Arabia was not the best place to get a good job and live as they had become accustomed to in the West.
MBS has looked at the problem more intently than anyone before him and openly admitted that he personally knew a lot of trained and capable Saudis who emigrated to seek better career opportunities elsewhere. What a lot of these expatriate Saudis would never make a lot of noise about (so as not to offend the Saudi government) was that the strict enforcement of Islamic lifestyle rules was not popular with a lot of Saudis and especially not with their Saudi wives (who were educated and knew what was going on in the rest of the world). MBS correctly concluded that relaxing many of these rules (like allowing women to drive automobiles) would keep some able Saudis in Saudi Arabia. Many of the Saudis working in government jobs did so out of desperation because the commercial sector was not just staffed by foreigners (who held nearly all the management and supervisory jobs) but unofficially controlled by them. The foreigners are organized and realize that it is in their interest to keep Saudis dependent on the foreign workforce. Saudis like to quip about their “foreign slaves” but the reality is rather different and it is unclear who has actually enslaved who. One thing has become clear; more Saudis are now aware of how backward and uncompetitive they are and are willing to accept all manner of reforms.
MBS is probably aware of how neighboring UAE (United Arab Emirates) has gone about establishing military industries. Since the 1990s the UAE has invested heavily in defense manufacturers inside the UAE and the Middle East. One of these firms is Adcom Systems United which has been around since the 1980s and produces a wide range of military equipment. It does this by licensing a lot of technology and forming partnerships with high-tech firms in the West. Adcom has been working on UAVs since 2003 and has delivered several models for both military, police and commercial use.
The UAE has been encouraging local companies to develop weapons for use by local forces and export markets. So far this has resulted in UAE firms manufacturing military trucks, guided missiles, and small arms. Despite this since 2008 UAE has become the third largest importer of weapons in the world and the largest in the Middle East. The other two big spenders worldwide are India and China. In the Middle East, the UAE imports 50 percent more weapons than Israel.
Note that the UAE makes this work by doing most of the manufacturing in foreign countries, usually other Arab states that have little or no oil income and a better work ethic. MBS is going right to the heart of the issue in an effort to see if Saudis can support themselves without the economic crutch oil has provided for the last two generations.