Saudi Arabia’s First Step Is Admitting It Has an Oil Problem

The Saudi royal family has gambled its prestige on a bold economic reform plan, meant to revive an economy battered by sharply lower oil revenues. But the prescriptions of “Saudi Vision 2030” are fraught with risk, not least because it threatens to dissolve the social contract that binds the House of Saud to the Saudi people.

Vision 2030, formally ratified this week by the Saudi cabinet as the National Transformation Program, provides a blueprint for a kingdom that offers less charity and more austerity. It calls for Saudi Arabia to reduce its dependence on the energy sector, privatize state-owned enterprises, and cut state largesse. The long-term objective is to prepare Saudi society for life in the twilight of the oil age.

“We have an addiction to oil,” admitted Deputy Crown Prince Mohammed bin Salman, who leads the pro-reform camp within the ruling House of Saud. “This is dangerous. It has delayed the development of other sectors.” He hopes that, within two decades, the world’s greatest petro-state will derive most of its revenues from global investments and a diverse range of industries rather than energy.

The initiative amounts to future shock for a conservative society. Specific targets include tripling non-oil revenue by 2020, to roughly $141 billion, and the creation of 450,000 jobs outside the government sector. In a country where two-thirds of workers are on the state payroll, public sector wages will be reduced to 40 percent of the budget, down from the current level of 45 percent, over the same time frame. To finance these changes, public debt is expected to substantially rise by $200 billion over the next five years. No explanation was offered as to how any of these targets could be realistically achieved within their timeframe.

Saudi Arabia is adopting Vision 2030 for the very simple reason that its current economic model is unsustainable. In the two years since oil prices tanked, wreaking havoc on the economies of major energy exporters, the kingdom finds itself trapped by the rising waters of a liquidity crisis. Last year, the country’s gross domestic product shrank 13 percent and net foreign assets plunged $115 billion as the government burned through cash to plug a $100 billion budget deficit. Though oil prices have rebounded to around $50 per barrel, the national budget calls for a break-even price of $66.70 this year — sharply down from last year’s $94.80 and a sign of the urgency to bring spending under control.

In an effort to stem the hemorrhaging, the Saudi government in March signaled its willingness to take out billions in bank loans. Even so, the IMF issued a dire prediction of national bankruptcy in four years if current patterns of spending continued.

Saudi Arabia’s fiscal woes date back to its ill-fated decision in the fall of 2014 to pump surplus crude into a buyer’s market. Though oil prices were set to tumble anyway — the market was oversupplied and consumer demand had slowed — Saudi intervention accelerated and intensified the collapse, driving prices down to levels not seen since the early years of the century. The Saudis insisted their action was motivated by the need to defend market share, but never hid their glee that lower prices would hurt the economies of geopolitical foes Iran and Russia (not to mention production rivals, especially the United States). But prices tumbled much lower and for far longer than they predicted, blowing a hole in state finances.

The situation was made worse by the fact that Saudi coffers had already been drained by a raft of new social and defense expenditures. Three years earlier, fearing the spread of the Arab Spring revolts against authoritarian rule, the Saudi royal family had announced lavish new subsidies and welfare programs estimated to cost $130 billion. The U.S. decision to not rescue traditional allies, like Egyptian President Hosni Mubarak, prompted Riyadh to launch a conservative counter-revolution — pouring tens of billions of dollars in aid and arms to allies threatened by social, political, and religious unrest.

The kingdom committed billions more to defense expenditures meant to counter its archrival, Iran. This year, Saudi Arabia replaced Russia as the world’s third-biggest military spender, with $56 billion allocated to equip its armed forces.

Saudi Arabia’s spending binge coincided with the emergence of the ailing King Salman’s young son, Deputy Crown Prince Mohammed, as the pre-eminent voice dictating policy in the kingdom. In less than a year, and to the obvious distaste of older members of the royal house, the ambitious, voluble 30-year-old prince has pushed for changes on issues ranging from the economy and defense to women’s rights and political reform. Germany’s intelligence service warned in a leaked report of the “latent risk that in seeking to establish himself in the line of succession in his father’s lifetime, [Mohammed] may overreach.”

Some say he already has. In addition to his role as second in line to the throne and chief of the royal court, Prince Mohammed’s decisive interventions in military and economic affairs have earned him the moniker “the prince of war and oil.” With no apparent experience in military affairs, foreign policy, or strategy, his decision to take over the defense portfolio placed his family’s prestige and reputation squarely on the outcome of two open-ended wars in Syria and Yemen. It was a remarkable gamble: He did this knowing that the kingdom ranked well down the global pecking order in terms of military effectiveness.

In Yemen, the Saudi Air Force — a sort of flying club for princes — has earned a reputation for brutal incompetence as it bombs and strafes residential areas and civilian targets. One of the most notorious incidents, among many others, are two Saudi-led coalition airstrikes on March 15 that struck a crowded market in the village of Mastaba, leaving 97 dead. To the intense embarrassment of the government and its Western arms suppliers, Amnesty International and Human Rights Watch have charged the Saudis with committing war crimes resulting in thousands of deaths and the displacement of 2.5 million people. “There is barely a single corner of Yemen or a single soul that hasn’t in some way been touched and scarred by this war,” reported Foreign Policy.

But it’s in the economic realm where Prince Mohammed’s influence has been felt most acutely. With a bachelor’s degree in law under his belt, the prince decided that he should not only lead the effort to restore short-term fiscal solvency but embark on the monumental task of transforming Saudi Arabia from a rentier state to an industrialized economy freed from the constraints of the commodity markets. And his goal couldn’t be more ambitious: Saudi Arabia, he predicted, will be weaned off oil revenues within a generation.

The Saudi template for reform titled “Vision 2030” mirrors an earlier report that appeared in December on the website of McKinsey & Co., a global consulting company that provides neoliberal solutions for real-world problems. Salman has admitted that the Saudi government works closely with the company. Saudi critics — and there are many — sneer that the Planning Ministry should be renamed the “McKinsey Ministry.”

In recent years, McKinsey has cultivated a generation of young Arab princelings enamored with Western-style economic reforms, and with thoroughly mixed results. As one of the company’s more trenchant critics recently pointed out, “Many of the countries who drank the McKinsey Kool-Aid became epicenters of the Arab Spring. Bahrain, Egypt, Libya, Yemen — each was convulsed by demonstrations, often animated by economic grievances.”

McKinsey’s approach to reforming foreign governments is dangerously flawed. The company’s school-lunch approach to economic reform — one size fits all, regardless of appetite and culture — makes no effort to consider each country’s unique history or social background. It also fails to consider whether the recipient’s political structures are robust enough to withstand the unrest that often emanates from job losses, privatization of state-owned enterprises and social services, subsidy cuts, and increases in the cost of living.

Authoritarian regimes — and absolutist monarchies in particular — appear more formidable than they really are. With power concentrated in one or a few hands, and with few if any independent outlets available for popular expression, the buildup of pressure from below has the potential to be explosive. The social contracts that trade state largesse for popular loyalty are fragile yet essential for maintaining stability.

The shah of Iran learned this the hard way in the late 1970s, when he encouraged his ill-fated austerity program to stave off a fiscal crisis, ironically caused by an unexpected shortfall in oil revenues. His fatal mistake was to pursue wide-ranging economic reforms without putting in place the sort of independent, autonomous judicial and political framework that could shoulder the load in the event of a sudden internal crisis.

The shah’s downfall haunts the older generation of Saudi princes. They understand the fragility of a monarchy whose brittle pillars rest on the quiescence of conservative clerics and a merchant class hostile to the free-market reforms that will undercut their privileges. They recall the traumas of 1964, when the spendthrift King Saud was ousted by his brothers, the assassination in 1975 of his successor King Faisal, the violent takeover of Mecca’s Holy Mosque in 1979 by religious extremists, and Iraq’s 1990 invasion of Kuwait.

In an interview with the Economist, Salman declared himself an admirer of former British Prime Minister Margaret Thatcher. But unlike Britain in the 1980s, Saudi Arabia today has no free press, no elected parliament, and no right to assembly. It lacks flexible political structures that might absorb and channel explosive social energies away from the center. Was the prince aware that even with these systems in place, his idol was eventually deposed? He did not say.

Nor did the prince offer a convincing answer when asked if the Saudi people would continue to accept taxation without representation. “This is not a decision from the government against the people,” he insisted. “This is the decision of Saudi Arabia. With the government that represents the people.”

Boiled down to its essence, that amounts to the classic autocrat’s response: “L’état, c’est moi.”