Providing for future generations

Saudi Arabia’s unemployment rate amongst nationals is now reckoned to be 20% and the population is growing at around 4% per annum. What can Saudi Arabia do to create more jobs for future generations?

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By  David Ingham Published  April 15, 2002

Growing population, growing unemployment|~||~||~|Like many ‘developing’ countries, Saudi Arabia can reel off some fairly impressive statistics. From a base of close to zero in the early twentieth century, the country can now claim to have over 18,000 schools, seven universities, and one of the lowest student-teacher ratios (around 15-1) in the world. It can also claim to have attracted $9 billion in foreign investment in the last two years and to be in the world’s top fifteen exporters.

However, for all those positives, there are two statistics in particular that give cause for concern. Informal estimates put the country’s unemployment rate amongst nationals at 20% at a time when the population is growing at a rate, also estimated informally, of 4% per annum.

The US Energy Information Administration puts the national population of Saudi Arabia at 17 million, half of it under eighteen. If population growth remains steady, the national population could head towards 50 million by 2050.

Along with Saudi Arabia’s growing budget deficit, the issue of unemployment is suddenly top of the agenda in Saudi Arabia. Prince Naif, the Kingdom’s interior minister, recently said as much. “Saudisation is a strategic goal,” he told businessmen in the Qassim region. “For that, we have opened schools, institutes and universities to prepare our youth to take up various jobs.”

The two issues of unemployment and the budget deficit are closely linked. More money being spent servicing the country’s fiscal deficit, now estimated at SR 630 billion, means less money to spend in ‘productive’ ways, such as infrastructure development, education and economic diversification programmes. Servicing the debt costs SR27 billion alone each year.

There is further reason to be worried. Whilst the population of Saudi Arabia is exploding, growth in oil output is nowhere near keeping up. According to a new report from the US Energy Information Administration, per capita oil export earnings have declined from $23,280 in 1980 to $2,653 in 2001.

Even if a huge petrochemical investment programme involving foreign companies does go ahead, a growing population will ensure that oil related per capita output is unlikely to increase. The need for the private sector to contribute more to GDP is acute.

The challenge is clear: pay down the public debt so that money can be put into more productive spending programmes, stimulate the private sector and increase the number of nationals working in the private sector. Can it be done?
||**||Ways of tackling the problem|~||~||~|
Experts contacted by Arabian Business think that the government has plenty of means for doing so at its disposal. Saeed Al Shaikh, chief economist at National Commercial Bank, told Arabian Business that the government could immediately begin a process of selling off its equity stakes in listed companies.

Longer term, the government could privatise public companies. Such moves would raise money to pay down debt and take money losing ventures off the government’s books. Privatised companies, the theory goes, would also become more efficient and would be able to grow, and thus hire people, more easily.

“As you corproratise and privatise industries they have to be run efficiently and obviously that will lead to layoffs. But that’s in the short term,” says Dr Al Shaikh. “In the medium to long term, as these companies become profitable, and the demand on their services grows, they have to expand.”

The first step, selling off the government’s equity stakes in listed companies, would be a simple transactional process in theory. The capitalisation of the Saudi Arabian stock market is currently around SR275 billion. The government currently owns about 33%, SR90 billion, of that capitalisation.

“The government can gradually offload that share to the public and whatever revenues are generated from selling its shares could be utilised to pay off or retire the debt,” says Dr Al Shaikh. What may be tricky, however, is the timing of such a selloff. Flooding the market with shares at the wrong time could push the market down.

“It’s hard to do it in bad years,” admits Dr Al Shaikh. “You don’t increase the supply because that will push the market further down. In 2000 and 2001, the Saudi stock market was generally fine; they could have offloaded part of those shares without harming the market.”
An even more difficult process will be the full blown privatisation of all or part of the country’s many state-owned entities. The prime example is Saudi Telecom Company [STC], which is currently in the process of what Saudis refer to as ‘corporatisation.’

Corporatisation is supposed to be a midway house, a process of injecting private sector discipline and efficiency into a state utility, so that it can be sold off in a positive state of health. “This [STC] is a revenue generating, profitable company that could be privatised and the revenues the government will generate from selling that company can be utilised to retire the debt,” says Dr Al Shaikh.

Another example of a company that could be sold off is Saudia. BNP Paribas has been hired to carry out a study on the form a privatisation may take.

Other candidates for privatisation include the money losing electricity companies (which are now being corporatised), airports and some healthcare institutions. Economists like Dr Shaikh believe that as these companies wake up to competition and the notion of customer service, demand for their services will increase and jobs will be created.

This process is, of course easier said than done. Restructuring money losing public entities may require job cuts in the short term and such things are never palatable, particularly with unemployment already a hot issue.

Still, the government claims that progress is being made. “Privatisation, a major element in our reform programme, is making headway with the latest restructuring of the Saudi Telecom Co. and electricity companies and the creation of the Telecom and Electricity Regulatory Boards,” says Abdulrahman Al Tuwaijri, secretary general, Saudi Supreme Economic Council.
||**||Foreign investment laws|~||~||~|
Privatisation of state companies isn’t the only thing the government can do to try to encourage job creation. A foreign investment law has been on the books for over a year now. The goal of that law is to bring in foreign investment in an effort to stimulate the private sector and create jobs.

There is concern, however, that the law isn’t yet achieving what it set out to. Specifically, the law excludes majority foreign ownership of companies in several sectors, particularly those like telecomms and aviation where there is the most potential not only for job growth, but also technology transfer. “Having these in the exclusion list, you reduce the potential for expanding the economy and there is an opportunity loss,” says Dr Al Shaikh. “Investors in the technology arena, for example, have proprietary rights that they don’t want to share.”

Prince Abdullah bin Faisal bin Turki, governor of the Saudi Arabian General Investment Authority, (SAGIA) adds: “If it were up to me, I would have opened all sectors to private investors, both local and foreign.”

There is talk of reviewing the exclusion list, but again the clock is ticking. Take the electricity sector, for example, where generation has been opened for foreigners investors, but distribution and transmission still remain closed. “It is rather contradictory of the government’s intention to privatise,” observes Dr Al Shaikh.

A recent move to bring foreign investment into certain aspects of the petrochemical sector has been widely reported, but such a move would really amount to the modernisation of an existing industry. Experts urge the government to focus on industries that are labour intensive, rather than capital intensive.

“The pharmaceuticals sector probably would generate more employment than petrochemical industries,” says Dr Al Shaikh. “Even in communication or IT, you have more labour than in petrochemicals. Maybe Saudi Arabia should have focused on these futuristic industries, rather than promoting these classical, traditional industries.”
||**||High expectations|~||~||~|
If all of the government’s economic policies do have some effect, the results will really only be seen in the long term. There are also short term measures, primarily making it too expensive for companies to hire foreigners, that the government can take.

However, that can be juxtaposed against the fact that it is also expensive for companies to hire Saudis since they expect more pay, and, according to several businessmen, are hard to get rid of if they don’t work out. “Some Saudi companies are very reluctant to hire Saudis because once they hire a Saudi they cannot fire him,” says one Saudi businessman, who prefers to remain nameless.

“You want to have that option of hiring and those that cannot make it, you want to get rid of them. Now the law does not allow you to do that. You feel you may have a liability. That does not encourage companies to hire Saudis.”

Plus, even if government policies can help create jobs, one question always remains. Can Saudis fill them?

A report by Dr Mohammed Duliem Al Qahtany, expert in international business and management at King Faisal University, suggests perhaps not. His report, ‘Challenges of the Unemployment Crisis in Saudi Arabia and its Solutions’ indicates that only 4.9% of Saudi university graduates in 2000 were in the field of management and economics, and only 3.5% in engineering.

Dr Duliem’s assessment is blunt. “Few Saudis have the necessary skills to replace foreign technicians, mechanics and other skilled workers,” he says.

Dr Duliem also alludes to another challenge the authorities have — expectations. Blessed with abundant oil wealth and what was then a small population, early Saudi leaders created a huge bureaucracy to employ nationals. Young Saudi graduates naturally expect the same thing, but the country can no longer afford it.

“The authorities are encouraging the private sector to hire more Saudis since the government cannot afford to continue financing more ‘make-work’ jobs in the bureaucracy,” argues Dr Duliem. “However, university graduates and other Saudi youth expect the government to continue with its long time policy of providing them with white collar office jobs as it has done for the past twenty years.”
||**||The clock is ticking|~||~||~|
A recent government initiative to encourage investment in the agricultural sector is a case in point. A plan to open up relatively poor, but potentially fertile regions like Najran, to agricultural investment could create abundant jobs. But will Saudis be prepared to take jobs that are considered ‘demeaning’? After all, a large proportion of the three million foreign workers in Saudi Arabia are ‘unskilled’ and earn low wages. They cannot be directly replaced with Saudis whose parents worked for the government on wages of $30,000 plus per year and expect the same.

Nevertheless, the government is claiming some successes in ‘Saudising’ the private sector. The banking sector, for example, is well staffed by Saudis at senior levels and has offered customers electronic services such as Internet and WAP banking. “These electronic systems have contributed significantly to improving the quality of banking services,” says Abdulrahman Al Tuwaijri. “Needless to say that a great deal of training of Saudi nationals went with applying these new advanced technologies.”

Saudi Arabia clearly has ways of dealing with its unemployment problem. The government can implement structural reforms that could boost the private sector and by cutting its debt it could direct money into more productive areas. At the same time, it can both oblige companies to hire more nationals and make it more attractive to hire them by reforming the labour law. Even then, however, there is no guarantee that Saudis will want to take the jobs on offer.

A government official once told Arabian Business that the word ‘fast’ has a different meaning in Saudi Arabia, an allusion to the country’s conservative nature. However, the need to act to reduce joblessness is pressing. With every day that goes by, the number of Saudi Arabians looking for work becomes that little big bigger.||**||

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