The old unsustainable Saudi model of state patronage is coming to an end. But will the new economic model be any different?
The recent purge in Saudi Arabia has generated both hope and cynicism—hope that the time for long-awaited reform might have finally arrived in Saudi Arabia and scepticism about this being another Machiavellian strategy to consolidate power in the hands of a young prince, Mohammed Bin Salman (MBS).
The recent anti-corruption shake-up represents both elements of reform and resistance. To fully appreciate the scale and drivers of this purge, one needs to consider the role of external stakeholders who have a vested interest in what happens in Saudi Arabia.
The power struggle in Saudi Arabia and the promotion of a young prince who has leapfrogged several elder contenders to claim the throne is fundamentally rooted in an increasingly urgent imperative for reform being felt both at home and abroad. It is easy to see why.
The country’s otherwise abundant oil revenues are failing to keep pace with its growing spending commitments to elites and citizens. As a distributive state par excellence Saudi Arabia has traditionally bought social peace by distributing oil rents in the guise of salaries, subsidies and transfers to the royal family and other elite constituents.
This ruling bargain is being stretched to its limits thanks to low oil prices and a growing population, 20 percent of which falls in the 15-24 age group. The unemployment rate stands at 12.5%. Public expenditures have quadrupled since the early 2000s. The IMF has recently predicted a budget deficit of 15% of GDP this year, and the economy's growth rate has come to a grinding halt at 0.03 percent.
This makes for a combustible mix. Even before the dip in oil prices there was a realisation among regime insiders that the status-quo is untenable. There was talk of reform even before the launch of Vision 2030, the ambitious initiative that aims to reduce Saudi Arabia’s dependence on oil. If so, then why has it taken so long to shake-up the system?
Despite an open public admission from the highest echelons of the royal family that the current system is failing, the regime has dithered from instituting genuine reform. Two key reasons lie behind the reluctance: age and autonomy.
Given the age profile of successive Saudi Kings serious fiscal reform has never been consistent with the private incentives of rulers. Most Saudi rulers reached the throne in old age with only a short horizon in front of them. For the last three monarchs the policy horizon was no more than 10-15 years. And, herein lies the challenge: even if prevailing fiscal regimes are unsustainable over the long-term, they are sustainable over the lifespan of the ruler. This is the commitment problem that ageing monarchies, such as Saudi Arabia, face.
It is in this context that MBS’s rise to power is being engineered. A younger prince at the helm helps to bypass the age trap and ensures a long enough horizon where genuine reform could become compatible with the wishes of the rulers.
To reform the system, however, MBS needs both age and autonomy. He needs a clean break from the historic deal that ensured the flow of resources to citizens and elites. The sort of autonomy early Saudi rulers enjoyed is unthinkable today.
They could decide who to distribute to and how much to distribute. But once such expenditure commitments were made they became set in stone, creating the sort of lock-in and path dependence that lends durability to weak institutions. In this context, reform becomes a prisoner to choices made in the past.
So, the argument goes, MBS must have an open field to play where he is unconstrained by the past. The recent shake-up is thus not just a means of extorting much-needed cash from rich princes and an effort to strike down possible opposition. It is also a signal that the old deal has reached an expiry date.
But it is inconceivable to imagine that a 32 year old prince could tear apart a well-entrenched system on his own. He needs the wink and nod from the right quarters. Royal succession in Saudi Arabia is never an isolated internal affair. There is simply too much at stake in Saudi Arabia for foreign powers.
Apart from being the world’s largest and the sole swing producing oil nation, Saudi Arabia is an important source of capital for global financial markets, and one of the most important clients of the global defence industry. Saudi support is crucial for regional proxy wars, and it's an important neutralising agent against an ascendant Iran.
Importantly, without regular cash injections from Saudi Arabia, many of the neighbouring states will find it hard to sustain their deficits. If Saudi Arabia crumbles, the entire geo-political balance in the Middle East can fall apart like a well constructed house of cards. Against this backdrop, major Western capitals and Tel Aviv have thrown their weight behind the succession.
While Saudi Arabia faces a moment of institutional possibility, this new opening should not be mistaken for genuine reform. Many pundits have prematurely termed Saudi Arabia’s recent reform efforts as a “revolution disguised as reform”. While the "Vision 2030" contains many laudable elements it is little more than a grandiose statement.
At best, it could be understood as a serious intent for reform. Genuine reform is always painful and messy, since it creates losers that need to be compensated. It requires vigorous engagement with and concessions for key constituencies. None of this is possible without the emergence of new bargaining structures that could help the Kingdom reset its state-society relationship.
There is another fundamental contradiction than runs against the logic of reform. And, that is Saudi Arabia’s external posture. At a time when the country should have been focusing on putting its own house in order, it is embroiled in a costly and brutal campaign in Yemen and is gearing up to open a new front against Iran. Saudi Arabia is like a giant ship trying to change its course in a troubled sea. The last thing it needs is more distractions.
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