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The Crown Prince and the New Saudi Economy


By Nicolas Pelham

January 24, 2018

Crown Prince Mohammed bin Salman’s goal of replacing a corrupt feudal state in Saudi Arabia with a Western-orientated market economy is doomed to be elusive unless he stops acting like a despot and rules like a reformer.

When Prince Mohammed announced his highly ambitious national transformation plan in 2016, he promised to privatize state assets, create 1.2 million jobs in the private sector and cut unemployment to 9 percent by 2020. It was rehashing an old panacea — weaning the kingdom off its addiction to oil.

Prince Mohammed has made progress. He has lowered obstacles to women’s participation in the work force, cut subsidies on utilities and raised indirect taxes. On Jan. 1, he increased fuel prices by over 80 percent and imposed a new 5 percent sales tax.

But his outreach to the private sector, on which his plan depends, has been stymied by a lack of capacity and institutional experience, and, increasingly, his hubris. His oppressive conduct is alienating the very sources he should be trying to attract.

Rather than plod on with austerity measures, he seems mesmerized by ambitious vanity projects and fattening his personal portfolio. The Public Investment Fund is supposed to be Saudi Arabia’s sovereign wealth fund, but the prince, who heads its board, runs it like his own business. In April, it acquired 129 square miles of state land for a sports and entertainment city. In August, it announced plans for a tourist resort bigger than Belgium. And in October, Prince Mohammed unveiled Neom, his $500 billion robot city, at an international conference. Once again, the Public Investment Fund led the way.

Few, if any, Saudi princes and businessmen were tempted to invest their largess — sometimes ill gotten — into these ventures. Many have learned from bitter experience. The prince’s uncle Abdullah, the previous king, planned six economic cities, including the King Abdullah Economic City on the Red Sea. But though the project’s cost, $27 billion, was barely 5 percent of Neom’s, it is expected to be ready only in 2035. Saudis saw another herd of white elephants on the stampede and shied away.

Undeterred, Prince Mohammed has resorted to arrests, asset seizures and shakedowns. In the process, he has turned the House of Saud — whose various branches once shared wealth, power and decision making — into a one-man state. Far from diversifying wealth, he seeks to centralize it in his hands. Scores of princes who were arrested in November have been transferred from imprisonment in Riyadh’s Ritz-Carlton hotel to its high-security jail. An additional 11 princes were hauled in this month, dashing hopes that the November arrests were a one-off.

Prince Mohammed still hopes to raise around $100 billion from the purge. Yet that amount would cover only his budget deficit in 2015 or equal the sum he hoped to raise from selling 5 percent of the Saudi oil company, Aramco.

His plans to turn the private sector into the driver of the kingdom’s post-oil economy are in disarray. He might court headline investment from Amazon and Apple, but moneyed Saudis who should be first on board prefer to squirrel their savings away.

According to the International Monetary Fund, the Saudi economy dropped into recession more sharply than predicted in the last quarter. The gross domestic product dipped 0.7 percent in 2017, substantially down on pre-purge predictions of growth of 0.1 percent, and worryingly below population growth of 2 percent.

Saudi Arabia’s ranking on the World Bank’s ease of doing business index has fallen from 26 in 2014 to 92 in 2017. Unemployment continues to increase, in part because of the influx of women into the job market. For decades the kingdom guaranteed public employment. No longer. Each year hundreds of thousands of young adults join the line for government jobs. The private sector is too undeveloped to pick up the slack. Prices are rising because of the reduced subsidies and new taxes. Economists expect the ranks of Saudis living in poverty — around 20 percent — to swell.

Fearing perhaps Iranian-style protests over economic anxieties, the prince has delayed key performance indicators in his transformation plan until 2023, including a balanced budget. His reductions in perks and allowances for state employees were reversed after almost seven months. Grumbling over the new taxes and fuel price increase prompted the hurried rollout of an extra $13 billion or more in handouts, particularly for students and soldiers.

A fear of uncertainty, too, could dampen Prince Mohammed’s hopes of raising finance. Capital flight, which averaged an estimated $8 billion per month when the purge began, has since fallen back, apparently because of worry of arousing the prince’s notice. But foreign interest in buying into Aramco might have been dented by the mercurial reputation of its chairman, the crown prince. Increasingly Saudi insiders speak of floating shares in the state oil company on the Tadawul, Riyadh’s stock exchange, rather than in London or New York, or of giving Saudi shareholders privileged access. A direct sale to Chinese state-owned oil companies is also being mentioned.

To revive investor confidence, Prince Mohammed should consider several safeguards. He should replace the family checks and balances he swept away with a due process and rule of law, which applies to royals and commoners alike. The corruption commission he unveiled on the eve of his purge should be a regulator, upholding international standards of corporate governance, not his personal star chamber skewing the rules for his cronies.

Investors and neighbours crave predictability, stability and the confidence that comes with a sound regulatory system. All three are what made Dubai. Properly carried out, such a system would please bankers who might welcome the chance to retrieve debts or land from princes that act like robber barons.

He also needs to be more transparent. Many of his investigations may be well founded. After all, over the three decades his father, King Salman, headed the family council, collecting copious evidence of his relatives’ misdemeanours. As the great medieval Arab historian Ibn Khaldun warned, if dynasties do not reform after three generations of rule, they risk going to pot.

Prince Mohammed needs institutional heft. He cannot haul the kingdom out of its oil dependency and create a diverse economy alone. His teams of foreign management consultants lack a bureaucracy and a local base. Rather than alienate family elders with decades of experience raising international finance, he should harness their expertise.

A new House of Lords would lessen the risk that wounded egos will spawn an opposition. Subject to his elders’ scrutiny, the crown prince might be more prudent about spending money, particularly on defence and security, which documents indicate was 43 percent over budget in 2016.

For now Prince Mohammed is offering more personal liberty and relief from the scowls of the religious police as compensation for the introduction of taxes. But as Abdullah, the previous king, recognized, more taxation — whether direct or indirect — will stoke demands for broader representation.

Greater accountability should be welcome. It might also ensure that the sums the prince accrued from the purge go into the country’s purse, not his personal account. And it would make for a more viable kingdom.

Nicolas Pelham, a Middle East affairs correspondent for The Economist, is the author of “Holy Lands: Reviving Pluralism in the Middle East.”