Jeffrey Towson is the former Head of Direct Investments for Middle East North Africa and Asia Pacific for Prince Waleed, nicknamed by Time Magazine as the “Arabian Warren Buffett”. He is the author of the global investing book “What Would Ben Graham Do Now?. His site is www.JeffreyTowson.com
It has been a big week in Saudi Arabia and, as someone who has developed +$10B of high profile projects in that country, I have been getting asked about it. So a few thoughts.
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First, there were uprisings in Tunisia, Egypt, and Bahrain. Then violence in Libya. And now there have been calls for a March 11 “Day of Rage” in Saudi Arabia. In response to all of this, King Abdullah has returned to Saudi from his post-surgery recuperation – and he has quickly released a +$35 billion package of reforms. All eyes are turning to Saudi Arabia and it has been a fairly tense week in the world’s other magic Kingdom.
Regarding the announced reforms. These are mainly economic, not political, in nature. And you can expect them to be very successful in the short-term. They increase the salaries of government workers, move more of the population into government jobs, subsidize education, subsidize housing, and so on. The King is bringing a $35 billion sledge hammer down on the Kingdom’s most immediate economic problem – the increasing unaffordability of life for significant portions of the population. And it will work. In a country of 23M, $35 billion is a big hammer.
But such reforms will likely also end up being counter-productive in the long-term. Saudi’s critical economic need is the creation of a more dynamic and diversified private sector. That is the only way to grow the economy at par with the rising population.
So giving more people government jobs (the majority of employed Saudi men already work for the government), unemployment insurance, more subsidized education, interest free home loans and so on is counter-productive. Does growing the already massive government sector create a greater self-reliance or ambition in the population? Does it help the private sector? Generally-speaking, Saudi needs a lot fewer government jobs and a lot more Tiger Moms. But short-term solutions are the order of the day.
Step back and take a look at Saudi Arabia from 30,000 feet. There is 25% of the world’s oil wealth. The population is a fairly manageable 23M (and they are all capitalists as far as I can tell). You have particularly robust infrastructure and functional (albeit large) government systems. You have hundreds of hospitals and over 30,000 schools (Saudi also has 60,000 students studying overseas). The politico-economic system has been fairly stable for 70 years. You have a unifying religion and culture. And you have some of the world’s greatest investors. You have everything a developing economy could ever hope to have.
So what exactly is the problem? Why did Dubai become a modern city in only ten years while Riyadh, a much wealthier city, seems frozen in time? By any measure the private sector remains fairly stagnant and, as the population continues to grow, this is resulting in a falling GDP per capita and rising unemployment.
This week’s problems are an acute flare-up of two chronic Saudi problems: political exclusion andeconomic stagnation. And the latter is fueling frustration with the former. And unfortunately, the economic problem is the most intractable and ephemeral. There is no quick fix that gets you a robust private sector.
Almost on cue, the region’s leading investor spoke up about this this week. My former boss Prince Alwaleed released a particularly thoughtful Op-Ed in the New York Times calling for a combination of greater political participation and the empowerment of women and youth. This is a fairly powerful solution to both the baseline economic and political problems.
Waleed is targeting both of the chronic problems. Women and youth constitute the majority of the population and are not part of the workforce today. I am no economist but when the majority of the population is not working, that seems an economic problem. He is basically calling for the political and economic engagement of both groups – which is a sledge hammer on the long-term economic problems. He is addressing the human capital problem that is the true difference between Riyadh and Dubai.
And it should work. In one move you can engage a massive, and particularly eager, population. It’s pretty clever. After almost a decade sitting down the hall from Prince Alwaleed, I have come to be in awe of his ability to figure out realistic solutions to real-world problems. In a world of talkers, he is a proven prime mover.
Overall, it has been a fairly butt-clenching week for Saudi Arabia. Everyone is holding their breath. Everyone is hopeful.
But it worth recalling the last time reforms were seriously considered. This was about 7 years ago when oil went below $50 per barrel and there were serious economic concerns. Reform seemed inevitable. But as the price of oil rose, the concerns mostly vanished and everyone started building economic cities (talk of reform usually disappears when oil hits $80). We’ll see if the current situation lasts longer.