Abu Dhabi, UAETuesday 18 June 2019

Saudi Arabia embarks on $130bn voyage to economic change

The Arab Spring has spurred Saudi Arabia's quest to find jobs for its young. Billions of dollars help to create employment but more needs to be done to achieve lasting economic development in the kingdom.
Saudi Arabia has one of the youngest societies in the world, with three quarters of the population under the age of 30 and about 60 per cent under 21. AFP
Saudi Arabia has one of the youngest societies in the world, with three quarters of the population under the age of 30 and about 60 per cent under 21. AFP

The Arab Spring has galvanised governments across the Middle East and North Africa into action to create desperately needed jobs and raise living standards.

Nowhere is that more evident than in Saudi Arabia, the Gulf's largest economy, where about 40 per cent of 16 to 24-year-olds do not have a job.

The political upheaval of last year has given an extra urgency to the kingdom's quest to create work for its young people. It has also ushered in laws and policies aimed at attaining the enormous goal of creating three million jobs by 2015 and double that by 2030.

Now the question for the country that has become used to being able to buy anything it wants, is whether it can also buy its way to competitiveness and productivity.

"There's been a whole plethora of reforms," says Professor Michael Porter of the Harvard Business School. "It's a start - but it's just a start, because the country is still not performing well enough from an economic development point of view."

King Abdullah announced a US$130 billion (Dh477.5bn) spending plan on his return to his kingdom last year after a three-month absence receiving medical treatment for a back complaint in the US.

It was heavily weighted towards job creation, housing and education, which has taken the lion's share of this year's budget.

A quarter of total spending and the biggest allocation in Saudi history is to education. The huge injection of funds into the economy is drawing in more multinationals seeking new contracts to compensate for slowing markets elsewhere and keeping the malls and hotels of Riyadh bustling.

The Olaya district of downtown Riyadh is a mix of Cartier and Gucci stores set alongside shabby buildings and potholed pavements. It is a pell-mell arrangement of wealth and abandoned construction materials. Olaya is not worried about competing in any tidy towns competition.

The commercial heart of the capital is overlooked by the imposing Kingdom Centre, owned by the Saudi billionaire Prince Al Waleed bin Talal, which rises up from a hill like a giant monolithic bottle-opener.

"The whole city is doing better and everyone is able to raise their rates a little bit," says Greg Pirkle, the American manager of the 249-room Four Seasons Hotel which is located in the tower. "We are seeing a lot of multinationals coming in setting up headquarters and offices here."

Among them are global companies such as the pharmaceuticals giant Pfizer, which is building a manufacturing plant in Jeddah capable of making a billion pills a year. More pharmaceuticals companies are also setting up, lured by government subsidies offered for home-grown medicine production.

Other multinationals such as BAE Systems, which has a long-standing presence in the kingdom and is supplying an order of 72 Eurofighter jets, has pledged to boost its footprint in Saudi Arabia through the acquisition of local companies.

Increasingly, companies that do business with Saudi Arabia are being encouraged to create jobs and training for locals as employment creation has been catapulted to the summit of the government's policy priorities.

Prince Turki Al-Faisal, the influential Saudi royal who once led the kingdom's intelligence service and was an ambassador to both London and Washington, raised the challenge of creating jobs in a speech to the Global Competitiveness Forum in Riyadh last week.

"The challenge of dealing with our youth is persistent," he said. "Reviewing our economic and educational policies is not an option - it is an imperative. The wellbeing of our people is the real objective of our statecraft."

Saudi Arabia used to enforce a blanket policy of 30 per cent local employment for foreign companies. But now companies are graded into 230 categories to establish what proportion of employees should be hired locally. Companies are penalised if they lag behind the industry average, says the labour minister Adel Fakieh, who says the system relies on a "carrot and stick" approach. Those investors who do not employ enough Saudis will find it more difficult to get visas for foreigners.

The kingdom's key employment statistics reveal the extent of the challenge it now faces. Within countries in the Organisation for Economic Cooperation and Development, about 45 per cent of school-leavers gain some type of vocational training. But in Saudi Arabia, just 9 per cent do so.

The government is now more than a year into its Hafizjob-seekers support programme, under which the labour ministry provides search support, a matching of skills and basic training to more than a million Saudis. It also pays out about 2,000 Saudi riyals (Dh1,958) a month for a maximum of one year to about 750,000 job seekers. The goal is to swap some of the 8 million expatriate jobs for home-grown positions.

But in doing so, the government will also need to wean off new job market entrants from better paid public-sector government openings and towards the more demanding private sector.

When compared to some of the indebted nations of Europe and the lengthening unemployment queues in countries such as Greece and Spain, Saudi Arabia's fiscal position may not seem so dire. After all, this is a country that controls almost 20 per cent of the world's oil and holds about $650bn worth of overseas assets.

Yet the huge rise in public spending of the past year is putting pressure on its financial resources. The current price of crude is just 20 per cent away from the break-even price needed to balance the kingdom's books this year, Prince Turki said last week.

The country's leaders do not have to look back far to remember the kingdom's dark days of the early 1980s when the price of crude collpsed and output fell from about 10 million barrels per day to just 4 million, forcing the government to dip into its investment reserves and borrow funds to service its payrolls.

More than two decades on, the crisis of unemployment is even more apparent. The political strife in the region of the past year has underscored the urgency of creating jobs in the private sector - a reality that has been acknowledged by both Prince Turki and the labour minister in the past week. Today, Saudi Arabia has one of the youngest societies in the world, with three quarters of the population under the age of 30 and about 60 per cent under 21.

Finding sustainable jobs for them will be a challenge in a country that derives the vast majority of its income from oil and petrochemicals production, which will only ever be able to support a fraction of the country's workforce in employment.

As the government throws billions of dollars to create the jobs it needs to keep its burgeoning youth off the streets, it may still be some way from being able to compete for them on equal terms.

The stick appears to be working but it is not yet clear whether the carrot is close to doing the job by itself.

"You can't just create jobs - you have to create competitiveness and successful enterprises," says Prof Porter. "The government can hire more people or create rules that require others to hire more, but unless productive jobs are being created you ultimately won't have enough money. Not even Saudi Arabia."

scronin@thenational.ae

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Updated: January 31, 2012 04:00 AM

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