The Geo-Political Challenge To Riyadh.

Saudi Arabia accounts for 34% of the GDP of the whole Arab world, although it has only about 8% of its population. This sort of economic power brings with it political clout that Saudi Arabia - which has long relied on US power to protect itself - is willing to wield only with kid gloves. Saudi Arabia fears Iran acquiring nuclear weapons because that will create Arab popular pressure for the Saudis to follow suit, challenging the ingrained habit of a US-friendly, quietist foreign policy in the Middle East.

Riyadh is as yet unwilling to offer major backing to Sunni Arab groups in Iraq to challenge Shi'ite and Iranian influence which Saudi officials had publicly denounced. A Saudi government official was last week quoted as saying: "Sunni tribes are knocking at our door asking for help. See the retinue of foreign leaders coming to Riyadh. But are they (Saudi rulers) ready to assume the leadership role?"

Saudi Arabia, which houses Islam's holiest shrines, has long been the bane of opposition groups in Arab countries, who say it should use its political and economic influence to press Washington to ease its backing for Israel in the decades-old conflict with the Palestinians. Since the oil boom began, the main development in Saudi foreign policy has been a relatively innocuous shift of interest towards East Asia, scene of several high-profile trade visits.

However, Saudi Arabia's archaic system of government - an absolute monarchy with undisclosed budgets and competing princes - critically saps political and economic potential. In a recent reprint of his book, "The Rise, Corruption and Coming Fall of the House of Saud", Sa'id Abu-Rish wrote: "No basic reforms of the obsolete government system or attempts to stop the royal family's wasteful ways are being contemplated".

Government plans to diversify the economy are hampered by poor international flight connections and a lumbering national airline, Saudia, which businessmen wait to see privatised as promised for years. One problem is that Saudia is grossly inefficient, over-staffed and cannot refuse to give free seats to numerous members of the royal family.

The World Bank says Middle East oil exporters' current account surpluses rose from an average of only 6% of GDP in 2002 to almost 23% in 2005. As they start spending the windfall, billions of dollars are earmarked for upgrading infrastructure and increasing production in the oil and gas sectors. But GCC states are emulating the UAE emirate of Dubai in diversifying into new sectors including tourism and financial services.

The IMF said until recently Middle East oil producers had spent prudently. The Financial Times on June 29 quoted Mohsin Khan, director of the IMF's Middle East and Central Asia Department, as saying of the GCC states: "They're starting to plan and people are talking about large scale projects in the works. We're glad to see it".