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Low Oil Prices and New Departures in Saudi Arabian Social Policy: A Promising Sign for Development?

28 Apr 2015


Low Oil Prices and New Departures in Saudi Arabian Social Policy: A Promising Sign for Development?
As a major oil exporter, Saudi Arabia has been facing an economic downturn since petroleum prices began to drop in 2014. Yet social programmes have managed to remain largely unaffected, benefiting from a combination of political necessity and improved fiscal policy. If this paradigm is maintained, it could bode well for development in the kingdom.

Benedict Craven holds an M.Sc. in Development Studies from SOAS, University of London and his research interests lie in labour markets, social policies and the politics of capital ownership in the Gulf region. At the time of writing he was an intern with UNRISD's social policy programme.

Low oil prices and new departures in Saudi Arabian social policy


2015 is projected to be demanding for countries dependent on oil exports, with plunging prices leaving fiscal planning in turmoil. As can be expected, for many exporters this presages serious repercussions for social policy. Budgetary planning for 2015 is being revised downwards and countries are preparing for anything around USD$40 a barrel, with prices sliding well beneath most 2014 projections. With government revenues evaporating, policy makers are being forced to make some very tough choices, and social expenditure is already being trimmed from many budgets. However, the doom and gloom is far from uniform. Some petro-states are set to maintain or actually increase spending on social programmes in 2015. Saudi Arabia is a particularly interesting example of such a case, as a country heavily dependent on oil revenues that has been known for making deep cuts in social spending during past price slumps. What has changed this time? And what does this mean for Saudi Arabia?

To get a picture of how and why Saudi Arabia’s social policies are defying low oil prices first requires some understanding of the wider context. Since the 2011 Arab Spring, new social policies have been consolidated across the MENA region. The autocratic Saudi state is no exception, with the dual murmurings of social unrest and radical Islamism being all too palpable for those with a vested interest in the status quo. The long-existing social contract between the royal family and Saudi citizens conforms to many perceptions of a ‘rentier state’; it is patrimonial in design and also somewhat complacent in character. The royal family maintains supreme authority over large segments of economic activity and an extensive public sector that many citizens rely on, while promoting and legitimizing itself by delivering a panoply of social programmes. Therefore, questions of provision and welfare are ultimately controlled by the monarchy.

Increasing social spending...


In contrast to the budget reductions in many oil exporting states, the Saudi government announced on 25 December 2014 that the national budget—with a particular focus on healthcare and education — would reach a record USD229 billion in 2015, a nominal 0.6 per cent increase on the previous year’s figure. This sum is not quite as impressive a ‘record’ as widely publicized: adjusting for inflation rates so far in 2015 makes it a 1.6 per cent drop in real terms. Still, alongside current oil market conditions, the budget will leave a deficit of USD39 billion, or 4.8 per cent of projected GDP in 2015, making it quite a noteworthy commitment. It stands out even further when juxtaposed with responses to oil price volatility between the 1970s and the early 2000s, when Saudi Arabia endured a series of deep public spending cuts across sectors in the wake of oil price slumps. With much of the population dependent on the public sector and social services, budget slashes led to serious rises in poverty. Per capita incomes in 2001 were just 41 per cent of what they had been 20 years earlier, and in addition social welfare programmes had atrophied under austerity measures.1 The relationship between low oil prices and austerity was evident as recently as 2009, when investment in government projects was 25 per cent less than in 2010 when high oil prices resumed.2 Accordingly, the decision to announce a nominal social spending increase in 2015 against an economic background of contracting oil revenues signals a notable departure from past practices.

While not at the vanguard of the Arab Spring, Saudi Arabia has nevertheless felt repercussions from regional events. Inveterate corruption and often ruthless repression are natural breeding grounds for subversion—a danger for the regime that has been amplified by upheaval in nearby countries. In order to placate the growing risk of domestic unrest and avert the instability afflicting the Arab world, ensuring high levels of social provision has become a perceived exigency for regime security. In essence, questions of political reform are being bought off by improving social policy, attested to by the high priority placed on social spending, particularly on education and health. The largest proportion of state funding in the 2015 budget was allocated to education, making it 25 per cent of the total and a nominal 3 per cent growth on the year before. Next is health and ‘social affairs’—including welfare, poverty eradication and support for citizens with special needs—which constitute 19 per cent of total government spending, a big increase from 13 per cent in 2014. These upward figures reveal a fundamental transformation in the Saudi government’s response to crisis—from invoking austerity to ensuring consistent and even expansionary provision of social services. Therefore, emerging as a new dimension to the patrimonial social contract in Saudi Arabia, social policies are essentially being insulated from oil market volatility. This signifies an implicit guarantee of social programmes and services to citizens, whereas previously public provision had ebbed and flowed more commensurately with oil prices. For the Saudi government, it is a concession that purchases social equanimity. Yet for this strategy to truly stand out from past practices and embody lasting change, permanency is key.

...thanks to countercyclical fiscal policies


Saudi Arabia has had a reputation for mismanaging oil revenues in the past, characterized in part by these large fluctuations in social spending. Yet some prudential macroeconomic adaptations have been emerging to counter this. Saudi Arabia has amassed enough domestic and foreign currency—valued at around USD750 billion—to maintain levels of social service provision, in the short term at least. In addition, these reserves can be replenished by plentiful liquidity and low interest rates in the domestic banking sector, as well as a range of other state-owned assets—though current reserves alone are projected to cover expenditures for the next six years or so. These encouraging circumstances are largely due to the kingdom’s growing use of countercyclical fiscal policies, which have helped to obviate boom and bust oil volatility. In essence, this term means capturing fiscal surpluses under high petroleum prices to redeem deficits and continue spending during slumps, and accordingly ‘counter’ economic cycles. The 2015 spending increase has recourse to such savings, which have been accrued from high prices in recent years and can be called upon to temper oil revenue losses and finance budget shortfalls. Hence a decisive adjustment of macroeconomic policy has emerged, where revenues from oil booms can support social policy pledges during slumps.

While high levels of social spending aim to divert any ‘threat’ of political reform for the regime, increased and sustainable investment in social policies has the potential to be an important driver of economic growth and diversification—a development objective the kingdom has grappled with for decades. Expanding employment opportunities in the public and the private sphere is viewed as essential in making serious headway towards both diversifying the kingdom’s fiscal base and providing jobs for a booming population. This is mirrored in the 2015 budget, with social disbursement being secured in key sectors that have been prioritized in previous years, particularly in education, welfare and health, for example by constructing new schools, universities and medical centres and delivering a range of social protection and assistance programmes. Saudi Arabia’s protracted dependency on oil revenues and sluggish non-oil economic growth has long been a thorn in its side, and so consistently high investment in education presents a good opportunity to reduce unemployment and see economic diversification progress. This can be compared with approaches to social programmes in the past—munificent during oil booms and austere during crises—inconsistencies that were deleterious for poverty, welfare and economic and social development.3 It seems that the Saudi regime has been startled out of its complacency since the Arab Spring, and is having to try harder to pacify citizens and follow through with its social objectives without disruption. Its ability to do this in 2015 oil market conditions is testament to the efficacy of its countercyclical fiscal policies. Presenting a dilemma of its own, the emerging social policy guarantee is an expediency that bodes badly for questions of political reform, but possibly quite well for social development.

A model for the future?


However, while consistent or expansionary public provision signals a movement away from past retrenchment, any acclaim should remain guarded. From the perspective outlined here, the basis for change in Saudi Arabia has been traced to wider regional insecurity, meaning improvements can be seen as reactive rather than proactive. This suggests a possible lack of organic political will which could in turn militate against development, an idea that needs to be explored. To do this, we need to systematically evaluate the substance of these changes and ascertain whether they should be seen as genuinely transformative or merely superficial. Primarily, the sustainability of the new model has to be assessed. In terms of finances, the possibility of oil prices staying low in the future needs to be considered. Politically, attention should be paid to whether the Arab Spring’s effect on Saudi policy making will be a lasting one, and whether improving social policy provisioning will continue to be seen as a pillar of regime security. Regarding the policies themselves, if social policy improvements can be seen as a form of political expediency, how does this affect their design and impact? The redistributive purview of social policies also needs to be analysed, such as whether or not social investments can—or are even designed to—address structural income inequalities and political marginalization, particularly relating to gender, creed and ethnicity. In other words, do citizens have equitable access to social policies? If not, what are the developmental implications of this? More broadly, are the social policies which benefit from consistent or expansionary fiscal space actually conducive to meeting national development targets or promoting inclusive development in general? With these questions in mind, an in-depth appraisal of the emerging new aspects to Saudi Arabian social policy can begin to take solid form.

FOOTNOTES
1Jones, T. 2003. "Seeking a 'Social Contract' for Saudi Arabia." Middle East Research and Information Project 33, pp.1-4.

2Ibid.

3Karl, T. L. 2007. "Oil-Led Development: Social, Political and Economic Consequences." CDDRL Working Papers 80, pp. 1-34.

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This article reflects the views of the author(s) and does not necessarily represent those of the United Nations Research Institute for Social Development.