Saudi Arabia

Can Crown Prince Abdullah lead his desert kingdom into the 21st century?

Last fall, Abdulrahman al-Tuwaijri received word that he would be exchanging his business suit for a robe and a red-checked head cloth. Saudi Arabia's Crown Prince Abdullah wanted the kingdom's long-serving representative at the International Monetary Fund in Washington to return home to spearhead a new Supreme Economic Council, an elite cabinet committee charged with liberalizing the economy. The Iowa State University-educated economist had never met the Crown Prince before the summons, but he hears from him often now. "He always wants to know why things aren't going faster," says al-Tuwaijri.

Things normally slow down in Riyadh in July. The sun is so intense that the pavement in the Saudi capital turns spongy and the air conditioning in the big American cars plying the streets can't cool them. But this summer, there's a new buzz of urgency. After decades of assuming that having the world's largest oil reserves was a guarantee of prosperity, the Saudis are finally waking up. Prodded by the Crown Prince, who has run the desert kingdom since his half-brother King Fahd suffered a stroke five years ago, Saudi Arabia is breaking a long-standing taboo and inviting in Western oil companies to explore for gas. The idea is to break the dependence on oil, which still accounts for the bulk of exports and government revenues. Abdullah is moving ahead even though oil prices and earnings have recovered from their low point in 1998, when the economy shrank 12% (chart).

Wooing the oil companies is just the beginning of Abdullah's effort to open his long-isolated kingdom. The Saudis are also taking steps to drum up both local and foreign investment in other industries, from specialty chemicals to food processing to telecommunications. They want to lure back the hundreds of billions of dollars in funds that Saudis have stashed offshore. For the first time, they are encouraging foreign tourists to visit their privacy-obsessed country. And they have applied to join the World Trade Organization--a move that will require stamping out pervasive software piracy and possibly opening up banking and securities brokerages to foreign companies.

Such changes are necessary, Saudi leaders say, to keep the kingdom from being marginalized in the fast-accelerating global economy. The 1970s oil boom gave the Saudis billions of dollars to build the roads, airports, and telecom systems needed to drag the sparsely populated desert land into the 20th century. But now, they worry that their statist economy is falling further and further behind in the entrepreneurial, technology-driven new millennium. "We need to give the system a jolt every once in a while," says Prince Sultan bin Salman, who was recently tapped to lead the tourism initiative, a Cabinet-level role.

Sultan, a 44-year-old former fighter pilot who blasted into orbit on the NASA space shuttle in 1985, is just one of a fresh generation of princes who are engineering the Saudi opening. Others include the chief of the newly created investment authority, Prince Abdullah bin Feisal bin Turki. A wisecracking 49-year-old, he promises to "exorcise" the bureaucratic obstacles that hamper foreign investment. These princely technocrats complement a Cabinet studded with Western PhDs. If they get their way, Saudi Arabia will experience a radical shakeup in the coming years.

The younger princes hope to encourage a more open economy where companies compete on their merits rather than by connections. They want foreign investors to bring in not just capital but management knowhow and technology. And they want to cut the overburdened government's payroll by persuading Saudis to take service jobs--including once-scorned positions in hotels and restaurants.

As Abdullah and his cohorts aim to change the way business is done in the kingdom, they even want to put curbs on the royal family. They plan to reduce the role of commission taking and agent fees--a system that raises costs and encourages corruption. Abdullah has recently begun requiring Western oil companies to sign pledges that they won't use agents and brokers or tamper with government officials. "We rule out the intervention of middlemen and fixers," he said earlier this year. "I won't accept any plan if I feel there is a lack of transparency."

UNLIKELY REFORMER. This new direction in Saudi Arabia has enormous implications for both the country's immediate neighbors and the wider world. If the Saudis succeed, the kingdom could become a source of capital and an economic engine to help reinvigorate a region that has lagged behind most of the planet in just about everything except weapons purchases. Failure could eventually usher in a new cycle of instability that, because so much of the world's oil production is concentrated in the Persian Gulf, could require U.S. intervention.

Of course, it would be silly to expect sweeping changes overnight. This society is one of the world's most conservative, and Saudi leaders worry about triggering an Islamic-led backlash a la Iran. If anything, government attitudes are hardening on women working or the mixing of the sexes. One Saudi businessman reports that authorities relentlessly pressured his organization to push the handful of women working in its Riyadh office to retire or move to other locations. Abdullah also has his hands full dealing with powerful princes used to being a law unto themselves.

Still, analysts warn that it would be a mistake to underestimate the determination of Abdullah and those around him. The 77-year-old Crown Prince seemed an unlikely reformer when he began running things. He has always been considered a traditionalist, close to the kingdom's bedouin, or tribal, peoples and fond of such activities as falconry. Abdullah has long occupied the key position commanding the National Guard, a tribal army maintained as a check on the regular armed forces, but he is rated as far less worldly than some of his brothers, including the King and Prince Sultan bin Abdul Aziz, the Defense & Civil Aviation Minister.

Perhaps that simplicity, however, and the fact that he has been less involved than other princes in business dealings, help him see things more clearly. Abdullah recognizes that the kingdom cannot afford to follow the same course in the 21st century that it did in the last decades of the 20th, when the state was a seemingly limitless source of jobs and services for Saudi Arabia's 14 million citizens.

Above all, Abdullah worries about what will happen the next time oil prices turn down. Saudi leaders are still recovering from the shock of 1998, when prices plunged to nearly $10 a barrel and foreign-currency reserves fell to dangerously low levels. The kingdom spent as much as $9 billion defending its currency against speculators. That glimpse over the precipice set the stage for today's reform movement. It also pushed the Saudis and other big oil producers to orchestrate the production cuts that have forced up prices.

While today's $30-a-barrel oil is providing a respite, years of economic stagnation have taken a heavy toll. Economically, the reign of King Fahd, who took the throne in 1982, has been a bust. From 1980 to 1998, growth averaged a meager 0.2% per annum, according to National Commercial Bank in Riyadh. Saudi per capita income, once on a par with that of the U.S., has fallen to just $6,972--less than a quarter of America's.

The Saudi economy is not even coming close to creating enough jobs. Saudi Arabia has one of the fastest-growing and most youthful populations in the world. Some 110,000 Saudis are coming into the workforce each year, and only 40,000 are finding jobs, estimates Brad Bourland, chief economist at Saudi American Bank in Riyadh. As a result, unemployment is rising. Bourland pegs joblessness at 14% overall and 20% among Saudis from the ages of 20 to 29.

Mix large numbers of unemployed youths with the kingdom's tradition of Islamic militancy, plus resentment of government and royal family corruption, and you would seem to have a lethal cocktail. Says one businessman: "If things had continued the way they were a year ago, we would have had an Algeria here," referring to that country's civil war.

There have been some signs of public unrest. In May, gangs of Saudi youths pestering women at the new Feisaliyya shopping complex in Riyadh clashed with the mutawas, or religious police. And the arrest of a religious leader in Najran, a rural province near the border with Yemen, led protesters to fire on the home of the local governor, a member of the royal family. In a sign of unease, authorities have stepped up public executions. This year already, 62 Saudis have been executed, mostly for rape, murder, and drug trafficking. Last year's total of 99 is likely to be surpassed.

But Saudi Arabia still has quite a ways to go before it becomes an Algeria. Despite its straitened circumstances, Saudi Arabia is richer than its neighbors, with the exception of the Gulf emirates. One can see the wealth in Riyadh, which has sprawled from a city of a few tens of thousands to more than 3 million in just four decades. While the capital has its pockets of squalor, there are also blocks of shops stocked with imported sports gear, furniture, and clothing, as well as garish, neon-lit restaurants. Builders still find it worthwhile to construct vast homes with marble floors and swimming pools on the assumption that buyers will snap them up.

FAMILY VALUES? Wealth or no, the aging of the Saudi leadership bodes ill for the future. Since the death of the kingdom's founder, Ibn Saud, in 1953, all four subsequent rulers have been chosen from among his sons. Twenty-four of these sons survive, but most are in their 60s and 70s. "You wonder how long the new generation of businessmen and technocrats [will] put up with these geriatrics," says a Western executive in Riyadh.

Abdullah is doubtless pondering the eventual need to pass the leadership to a third generation of princes more in tune with modern times. In what seems an effort to get the royal family to focus on these issues, the Crown Prince recently formed a family council of 18 princes. One prince privately says that the council was set up partly to help poorer members of the several-thousand-strong family. Depending on their clout, each family member draws a stipend from the government. The minimum, says one prince, is about $3,000 a month. One opposition group says royal family expenditures consume 40% of government revenues. More controversial is the involvement of family members in grabbing land and taking commissions on contracts. Such practices have helped some family members assemble fortunes totaling billions of dollars. The prince says the council would "discipline family members who misbehave and give us a bad name."

Abdullah also may be trying to strengthen his own hand in an eventual effort to curb the influence of other powerful princes--notably, the full brothers of the king, who include Sultan, the Defense Minister, and Nayef, the Interior Minister. There is speculation in Riyadh that if Fahd does pass away, Abdullah might pass over senior princes and name Salman, the 64-year-old governor of Riyadh, as Crown Prince. Salman is another full brother of the King but is widely respected in the family.

Such a maneuver on the Crown Prince's part would particularly annoy 76-year-old brother Sultan, who is reckoned to be third in line to the throne. But Sultan is an unpopular figure--not least because his defense bailiwick has been a lucrative spot for commissions. One Saudi analyst says the rivalry between the two senior princes is so intense that "it seems like we are in a presidential election campaign." In one comic episode last year, the analyst said, Abdullah visited a fast-food restaurant to mingle with ordinary people. Sultan quickly followed suit.

Of course, a healthy economy would do wonders to ease the transition. But Abdullah and his aides have their work cut out in creating one. State-controlled monopolies dominate key industries, from oil to power generation to telecommunications. While useful in developing the kingdom, many of these organizations have become liabilities, stifling competition and discouraging investment. Saudi Arabia's low level of investment--16.7% of gross domestic product vs. an average of 27% for all developing countries--is a key reason for Saudi Arabia's disappointing economic performance, says Said al Shaikh, chief economist at the National Commercial Bank in Jeddah. "Time is running out to catch up with Asian and Latin American countries," he warns.

Not surprisingly, the Saudis are turning first to their friends at the big international oil companies for help. In April, a high-level committee chaired by Foreign Minister Saud al-Faisal held talks with 10 of the usual suspects, including Exxon Mobil, BP Amoco, TotalFinaElf, Royal/Dutch Shell Group, Conoco, and Chevron. The Saudis want gas to feed a new generation of petrochemical, desalinization, and power plants that would create jobs, boost nonoil exports, and ease the strain on the kingdom's water and power infrastructure. The companies want access to the kingdom's oil and gas reserves. Turf conscious, Saudi Aramco, whose higher-ups initially opposed the opening, still stands in the way of the companies' exploring for oil, but Western executives see these projects as the beginning of the end of Aramco's monopoly.

Nevertheless, it is still far from clear how this program will play out. Some of the companies say they would welcome the opportunity to explore for gas but that they aren't in the business of funding utilities such as power and desalinization plants. Many sources in the kingdom say that the $100 billion investment figure being bandied about is way too high, at least for the medium term. Four or five gas projects amounting to $8 billion to $10 billion is more realistic, sources note. The companies aren't likely to reap a bonanza, either. A modest return in the teens is most likely. But the Saudis are holding out the carrot of eventual access to its oil reserves, which are the largest on earth and the cheapest to produce, at just $1.50 per barrel. Oil is off the menu now, says Ali I. Naimi, Petroleum & Mineral Resources Minister. "But," he adds, "who knows what will transpire 10 years from now."

In the meantime, the kingdom is pursuing a wider opening in other areas. It recently put through a package of rules aimed at encouraging investment. Foreigners will be permitted to own local businesses and real estate. Their foreign employees won't need a Saudi sponsor to work in the country, a requirement that hindered investment up to now. And tax rates on foreign companies are to be cut from 45% to 30%.

SKEPTICAL EXECUTIVES. Executives remain skeptical that these changes will be enough to make Saudi Arabia a magnet for investment dollars. And some question how open an economy the Saudis really want. Officials acknowledge, for instance, that their telecommunications industry badly needs an infusion of Western investment and technology. They have retained J.P. Morgan & Co. to privatize the local telecom monopoly, Saudi Telephone Co.--a deal that could be worth $10 billion. The plan is to bring in a foreign strategic investor such as SBC Communications Inc., which has made no secret of its interest. But critics say a better route would be to allow full-fledged competition in the kingdom. "The Saudis pay lip service to privatization and competition, but the state monopolies don't want it," says a Western source in Riyadh.

Abdullah's opening of Saudi Arabia is bound to be a slow and cautious process. But don't count the kingdom out. The Saudis may be conservative, sometimes infuriatingly so, but they have come a long way over the past century. It is too soon to say they won't leave their mark on this one.

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