Oil, Jobs, and Long Term Stability (Steffen Hertog, 15/8/2013, Carnegie)

Steffen Hertog, senior lecturer at the London School of Economics and Political Science and author of Princes, Brokers, and Bureaucrats.

There can be no revolution without a deep socio-economic crisis. Saudi Arabia hasn’t had such a crisis yet. On the back of its large oil revenues and even larger overseas financial reserves, it can provide enough employment for young male job-seekers—the crucial segment of the population—in the public sector to defuse any large-scale revolutionary anger.

The sustainability of this policy depends on simple arithmetic: oil prices and production levels on one hand, and domestic employment and subsidy costs on the other. The latter have been increasing rapidly and are likely to continue doing so, albeit at a more measured pace, due to continued growth of the working-age population. But even under pessimistic oil price assumptions, the kingdom will not run out of money for at least a dozen years. For the time being, it continues to run significant surpluses, as the oil price at which the government breaks even lies around $80 per barrel, a good deal below current prices.

While the kingdom’s mid-term outlook is the envy of its non-oil-producing peers in the region, the long-run outlook is cloudy if not bleak. The spending binge since the mid-2000s has made economic activity more dependent on the state budget. The share of private sector wages in GDP lies below 10 percent, compared to 40-50 percent in mature economies, meaning little self-sustained demand is generated. Most private sector jobs continue to be held by foreigners. In 2011, less than 400,000 of 4 million expatriate-held jobs in the private sector paid a salary of more than 3,000 Saudi Riyals ($800). This means that at prevailing wage levels, there were precious few positions for which Saudis would even consider applying, let alone successfully compete against migrant job seekers.

Recent government efforts forcing employers to increase their share of Saudi employees have increased the number of privately employed nationals, but the new quota system is complex and hard to monitor; employers have developed a variety of evasion techniques. As long as an open migration system forces nationals to compete with Asian workers at rock-bottom wages, businesses will have strong incentives to prefer foreigners, undercutting the private sector job creation for nationals that is needed for long-term stability. The use of low-cost labor has also led to stagnating or declining productivity, moving the kingdom away from the post-oil “knowledge economy” it strives to build.

In the long run, Saudi Arabia will have to undergo a painful shift away from both public sector over-employment and dependence on migrant labor. Such a shift means short-term pain for both citizens and business. Times are probably too good to impose such pain right now. Once the state reaches its fiscal limits, however, the forced shift away from state dependence would be all the more sudden and violent. This does not guarantee revolution, but it would mean potential for serious instability for the first time in decades.

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