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Saudi Arabia’s crisis is economic and demographic

Saudi Arabia’s crisis is economic and demographic

Saudi Arabia: AEI’s Karen Young participated in the Hoover Institution’s panel, “Saudi Arabia in crisis.” The panel was moderated by Samuel Tadros of the Hoover Institution, and included Elliot Abrams of the Council on Foreign Relations and Simon Henderson of the Washington Institute. Dr. Young’s remarks and commentary are presented below. A recording of the event can be viewed here.

There is an assumption in Washington that Saudi Arabia is in a state of crisis. The US-Saudi bilateral relationship is shaken, but the outrage over the murder of Jamal Khashoggi has also seeped into Saudi domestic politics, not in an upheaval in the leadership or direct threat to the crown prince, but in an increasing awareness on the part of the king that citizens need reassurance. The king and crown prince are currently on a “listening tour” of the country, meeting citizens in traditional receptions. Like the United States, domestic politics in Saudi Arabia are in a period of flux, driven by demographic changes, economic challenges, and an attempt to redefine national identity. This is not too different from some of the challenges Americans are facing. People have anxiety about jobs, about competition, and about their country’s role in international peace and security.

While we withdraw inward, Saudi Arabia has been opening and engaging outward, in military intervention in Yemen, in aggressive foreign policy towards its neighbor Qatar, and in efforts to liberalize its economy, both as a destination for foreign investment and as a source of outwardly placed international capital for new technology. The Khashoggi murder and public outrage has put Saudi Arabia, and its crown prince, on the spot. Saudi Arabia is in a defensive position.

The subsequent media attention has inflated the global economic position of Saudi Arabia, and probably the nature of its ties with the United States. Saudi Arabia is an important partner in the Middle East for the United States, without a doubt. We have some very important economic ties, particularly as the government of Saudi Arabia is a major investor in US securities, both debt and equities. Saudi Arabia and its sovereign wealth fund the PIF are also increasingly important investors in US technology firms and in global capital invested in infrastructure and downstream energy products.

But, the reasons for the US to maintain its close ties with Saudi Arabia reflect more on Saudi Arabia’s regional political leadership position, its impact in oil markets, and the ripple effects of its economic stability on the wider MENA region. As far as US corporate interests (and broader US economic interests) in Saudi Arabia, these are more limited. Yes, Saudi Arabia has provided some lucrative engagements for consultancies and investment banks. (Saudi Arabia and its GCC neighbors now account for about 25 percent of emerging market bond issuance over the last two years, $144 billion of it.) Yes, Saudi Arabia is an important market for defense sales. However, these are a few industries among many; Saudi Arabia does not have the ability to significantly alter the financial stability of the United States.

We should care about Saudi Arabia for the role it plays in the Middle East, as an agent of development finance (which I outlined here), as a partner in global energy supply, as a source of remittances for poorer countries, and as a political force countering Iran. Mohamed bin Salman may be a part of that, but his success or failure depends more on his domestic constituency, his ability to engender and maintain loyalty, and his father’s approval.

Which leads to the evaluation of his core domestic agenda: economic reform and the Vision 2030 development plan. These plans include: the reduction of wasteful energy subsidies, creating alternative sources of government revenues through fee structures and a five percent value-added tax, efforts to attract foreign direct investment, and the Public Investment Fund as a magnet and engine for domestic economic growth. The agenda intends to address core vulnerabilities in the Saudi political economy: a labor market that is bifurcated between nationals and foreigners, unable to provide jobs and social inclusion for young people, with a heavy dependence on oil revenues for all economic activity and state spending, and a trajectory that is unstainable, both in political and economic terms.