Saudi Arabia and the Forces of Globalization

Chas W. Freeman, Jr., USFS (Ret.)^*

Ambassador

The dominant power on the Arabian Peninsula, the Kingdom of Saudi Arabia, has long been one of the world’s least accessible societies, with a famously inscrutable government. Even Saudi Arabia’s smaller Gulf Arab neighbors, who share ethnic, religious and other ties with the Kingdom but who are separated from it by their heritage as British protectorates, regard it with a mixture of envy, apprehension, and perplexity. Saudi Arabia is, after all, the only non-western polity to have successfully barred intrusion by Euro-American missionaries and soldiers.¹ The Saudi monarchy is the only traditional ruling structure to have survived the era of colonialism intact and on its own terms.² Its oil wealth and the international influence derived from it have made Riyadh the fourth corner of the traditionally triangular Arab East.³ The Kingdom was (with Israel) the only polity to have been successfully established by military conquest in the Twentieth Century.⁴ (Had the East India Company and its successor British Indian Empire not intervened to suppress piracy and preempt other powers from establishing a foothold in the Gulf, Saudi Arabia’s traditional borders would almost certainly have expanded to include the smaller emirates along the coast of the Persian Gulf and these small polities would have been absorbed by their larger neighbor.)

The Kingdom’s decision-making processes are largely invisible or opaque to those outside the inner circle of its royal family. It continues to defer to the uniquely demanding religious doctrines and social traditions of Wahhabi Islam, which many other Muslims in the region deride as aggressively austere and intolerant. Saudi law and custom forbid the practice of religions other than Islam. Saudi universities do not offer instruction in the Hellenistic philosophical traditions that were at the center of Islamic civilization at its height (and that subsequently flowed from there to Europe, where they inspired the Renaissance).

Despite this dedication to traditional ways, the discovery of enormous reserves of oil in Saudi Arabia’s Eastern Province in 1938, rapid growth in global demand for energy, and huge royalties from oil exports have enabled the Kingdom to manage a three decade-long program of modernization that is unprecedented in the scope of its speed, intensity, and breadth. Almost unbelievably impoverished and backward ⁵ within living memory, Saudi Arabia now possesses a physical infrastructure that any developed society would envy. This modernization has, moreover, been accomplished with remarkably little apparent social stress. Other cultures challenged by their sudden, humiliating encounter with superior Euro-American wealth and power have attempted, usually with disastrous results, to import Western technology without permitting contagion by the values associated with it.⁶ Saudi Arabia may be the only example anywhere to date of prolonged success in such an attempt.

Saudi monarchs, principally King Fahd bin Abdulaziz (the architect of the modern Saudi political economy), have invested the Kingdom’s huge revenue from oil over the past quarter century not just to promote economic progress but also to buttress Saudi society against change by reinforcing adherence to religious tradition. ⁷ They have built a remarkably complete, ultramodern physical base for a modern manufacturing sector and service economy while vastly expanding and modernizing their country’s religious infrastructure.⁸ Saudi Arabia’s mud-walled villages have become vast urban agglomerations, crisscrossed with high-speed divided highways, punctuated by high-rise buildings, and made visually exciting by grand modern adaptations of traditional Arab and Islamic architecture.⁹ Mosques that were small, stuffy, and shabby have been replaced by places of worship that are vast, air-conditioned, beautiful, and adjoined by enormous parking lots. The Kingdom’s relatively small nomad population is now more likely to transport camels to new pasturage on flatbed trucks than to herd them there on foot. The Saudi merchant class is as at home in London and Los Angeles as it is in Jeddah or Al-Khobar. But, by marked contrast with other developing societies, the hundreds of thousands of Saudis who have been educated abroad have not chosen to stay there. They have come home to the Kingdom (though they often maintain vacation homes in the United States, Britain, or other parts of Europe and many have a substantial portion of their capital invested abroad).

Paradoxically, the very harshness of its climate and the constraints that this placed on economic development in the pre-oil age both isolated Saudi Arabia and facilitated a misleading appearance of rapid integration into the global economy once oil was discovered. When the Kingdom was too poor to attract direct investment or sales efforts from the industrial democracies, Saudi merchants stepped forward to represent foreign companies and sell their products available to both Saudis and foreign pilgrims performing Hajj.

When oil money began to trickle into the Kingdom in the 1950s and ‘60s, and then to flood into it with the dramatic rise in oil prices imposed by the oil embargoes that accompanied the 1973 Arab-Israeli War, many more goods and services became available but the basic pattern of commerce remained unchanged. Saudi trading traditions could easily accommodate bottling, fast food, and clothing franchises, or automobile and air conditioning dealerships, or foreign-affiliated retail outlets and supermarkets — to cite a few examples. With minor adjustments, Saudi traditions were also able to facilitate the arrival and operations of foreign engineering, construction, and hotel management companies, accounting and law firms, and the like. Local agents or partners could fit all of these businesses into the well-established Arabian custom of restricting foreign business presences to agency and representation.

The influx of new commercial activities from abroad was nonetheless immense. Along with new businesses came millions of foreign workers to manage and operate them — initially largely from Europe, East Asia, and the Middle East; later, increasingly, from South Asia, the Philippines, and the Horn of Africa. High-rise construction, modern commercial architecture, an explosion of familiar brand names on neon signs, and a huge non-Arab population (most of it non-Arabic-speaking and much of it non-Muslim) transformed Saudi Arabia’s urban landscapes and altered its demography. But, appearances notwithstanding, less really changed than met the eye.

Shops continued to open and close on schedules set by calls to prayer in nearby mosques. Ownership of businesses remained overwhelmingly Saudi despite the fact that few Saudis sought or obtained management or employee positions in them. (Instead, some Saudi graduates of the Kingdom’s new religious universities found employment as religious vigilantes assigned to the air-conditioned malls that replaced open-air suqs as the shopping experience of choice. Others stayed at home or frequented the coffee houses and shiysha parlors between visits to the mosque.)

The fact was that foreigners continued to be barred from most direct roles in the Saudi economy. They could not own land or operate businesses on their own. To enter the Kingdom or its market, they needed Saudi partners or agents. To leave the Kingdom, even for vacation, they needed the permission of their Saudi employer or partner. (Very often this employer or partner had custody of their passports.) Foreigners could not obtain a visa to enter Saudi Arabia (except as Muslim religious pilgrims) without a local patron. And, in a pattern of patrimonial commerce ¹⁰ typical of Third World societies, they were present in the Kingdom on a long-term basis only at the sufferance and pleasure of a patron, often a royal silent partner of the Saudi merchant with whom they were legally contracted.

The oil money that built Saudi Arabia’s modern civilian and military infrastructure thus also built a class of ultra-wealthy Saudi contractors, each backed by a specific group of individuals or sub-family within the ruling Al-Saud and each with its exclusive tie-ins to specific corporations abroad. The emergence of this class of Saudi operators of foreign franchises was aided by the education of tens of thousands of Saudis in the United States at precisely the moment in the 1960s, ‘70s, and ‘80s when franchise and chain store operations first achieved unchallenged dominance of North American markets. Saudis educated in the United States introduced a wide range of U.S. retailers to their country.

Saudi Arabia’s sudden wealth from oil transformed it in a few years from a collection of ill-lit desert towns to a constellation of urban clusters illuminated by the neon icons of (mostly) American fast food, furniture, automotive, office machine, and other franchises. The Kingdom’s merchants then sought and gradually achieved a similar presence by European couturiers and other upscale retailers, often by introducing them to franchising and other models of collaboration that Saudis had first learned from their partnerships with North American mass marketers. So Saudi Arabia became an unwitting collaborator (or source of contagion) in the phenomenon known as “globalization.”

The often unstated premise on which foreign companies sought Saudi partners to sell their goods and services in the Kingdom was the global image of Saudi Arabia was a famously wealthy and relatively populous society. But the Kingdom’s per capita income has been in steady decline over the past two decades, falling from equivalency with income levels in the United States at the end of the 1970s to only a fifth as much as American living standards today. Some of this decline reflects the exceptionally rapid growth of Saudi Arabia’s population, which greatly surpasses its economic growth.¹¹ National income must now be shared among an ever-larger number of Saudis.

Some of the fall in living standards, however, reflects the slow and uneven growth of the Saudi economy. Overall, the Middle East has been generating rates of economic growth that are less than half those in East Asia. Rates of return on investment in Saudi Arabia have remained generally lower than those in the developed economies of Europe and North America, with the result that wealthy Saudis have tended to invest disproportionately abroad rather than in the Kingdom.¹² Saudi Arabia’s economy remains closely linked to the multiplier effects of revenue from energy exports, primarily oil. But oil is a commodity subject to wild price swings¹³ that reflect every factor constraining short-term supplies or affecting demand. When demand and therefore prices are low, the Kingdom’s government has a serious cash flow problem.¹⁴ If the Saudi government cannot pay its bills on time, its contractors cannot pay theirs either. The staffs of large merchant conglomerates have sometimes remained unpaid for six months or more. The perceived unreliability of Saudi Arabian public finance is emerging as an obstacle to the Kingdom’s further integration into the global economy.

^* The author is currently, inter alia, president of the Middle East Policy Council. He served as U.S. Ambassador to the Kingdom of Saudi Arabia, 1989-92 (during the Gulf War), and as Assistant Secretary of Defense for International Security Affairs, 1993-94.

¹ When Westerners finally gained access to the Kingdom of Saudi Arabia, it was under contract as “hired help,” not as conquerors. Americans and Europeans were able to enter the Kingdom only so long as they evidenced respect for Saudi religious and social tradition and accepted that any attempt to propagate Western religious, ideological, or secular values would result in summary punishment and/or deportation.
² Those non-western monarchies that did not, like those in Mexico, Peru, India, Central Asia, Africa, China, and Turkey, fall under pressure from Western imperialism, yielded to its tutelage or influence. Swaziland and Lesotho were incorporated into the British Empire. Bhutan and other Himalayan hill states became subdivisions of British India. Thailand practiced preemptive capitulation to European (and later Japanese imperial) influence to avoid conquest or colonization. The Japanese Empire sought salvation in self-westernization, before the defeat of its bid for domination of Asia subjected it to American-dictated reforms. The Shah’s unsuccessful attempt to restore the Persian Empire by westernizing Iran catalyzed the emergence of a republic in which many western-style institutions, like a parliament, coexist uneasily with novel forms of Islamic theocracy.
³ Traditionally, Baghdad, Cairo, and Damascus vied for primacy in the Mashraq. Arabia was, of course, at the center of world events for a couple of decades after the initial eruption of Islam from the Hejaz. Despite the presence of the Islamic holy places, it then became a political, economic, and cultural backwater within the Dar al Islam. Disparaging attitudes, tinged with envy, at the three points of the traditional triangle of power mentioned above reflect this earlier reality rather than the wealth, power, and commercial sophistication of the modern Kingdom and it Gulf Arab neighbors.
⁴The modern Kingdom of Saudi Arabia is the third dynastic iteration of the 18th Century alliance between the founder of the Al-Saud and the religious reformer, Mohammed Abdulwahhab. (The previous two Saudi kingdoms were overthrown by intervention from the Egyptian outpost of the Ottoman Empire, which saw both their religious extremism and territorial expansionism as threatening.) The Kingdom’s borders with all of its neighbors were long unsettled and undemarcated. Not until 2000, almost a century after the founding of the modern Kingdom, were its last major territorial disputes settled — through agreement with Yemen on a land and sea border, and with Kuwait on a maritime border.
⁵The Gulf Arab societies did not experience the many generations of innovation in equipment and technology that preceded the technologies of the present. By the time Arabian cities had electricity, the transistor and touch-tone phone had long since replaced the cathode ray tube and pulse telephony. By the time literacy was the norm in Arabia the computer was ubiquitous. By the time Arabian merchants had shoes, many of them were stylish footwear from Italy. (See the charming narrative in “From Rags to Riches,” by Mohammed Al-Fahim, London, 1995.)
⁶This is what 19th Century Chinese reformers advocated but could not achieve. They sought to preserve traditional knowledge as the basis of national culture while adopting Western knowledge for its utility. (“Zhong xue wei ti; Xi xue wei yong,” as Zhang Zhidong put it.) Given the failure of this strategy elsewhere, it is hard to believe that, absent the extraordinary wealth that oil has given them, Saudis could have been successful.
⁷ Universal education in Saudi Arabia has entailed universal religious indoctrination and many of the universities that oil money financed are devoted to religious rather than secular education. The result has been both a vast increase in literacy and in those schooled in the fine points of Islamic theology, if not in skills more relevant to employment in the industrial and service sectors of the Kingdom’s economy, which remain dominated by, expatriate guest workers.
⁸ Makkah and Medina been modernized, and their places of worship expanded to accommodate millions of pilgrims at a time. New mosques dot the Saudi urban landscape.
⁹ When Saudi Arabia established its special relationship with the United States fifty-five years ago in February 1945, Riyadh was a mud-brick town of about 12,000 inhabitants, closed to foreigners. Today it is a sprawling automotive city, with some of the world’s most notable and innovative architecture and engineering. More than 3 million people, a third or more of them non-Saudi, now live in Riyadh. Similar transformations have overwhelmed the traditional trading and religious centers of Dhahran, Jeddah, Makkah, and Medina.
¹⁰ “Patrimonial commerce” is my term for a pattern of business dealings in which the validity of transactions and their security depend on the approval, support or acquiescence of a patron rather than the rule of law. Very often the patron expects a commission, annual fee, or share of equity in the enterprise in return for his protection of the transaction or the business presence and activities it creates. In some countries, patrimonial commerce involves entrepreneurial bureaucrats or bureaucracies as patrons. In Saudi Arabia, patrons are typically princes — senior members of the royal family or their sons.
¹¹ Saudi Arabia’s population was about 9.4 million in 1980. By 1998 it was 20.7 million. It is projected to reach 33.7 million in 2015 and 46 billion in 2030.
¹² According to recent estimates by investment bankers, Saudis currently hold about $650 billion (equivalent to four times the Kingdom’s GDP) abroad.
¹³ A year ago, oil prices were about one-fourth what they are now.
¹⁴ About 78 percent of government revenue in Saudi Arabia still derives from royalties paid by the state oil company, Saudi Aramco.