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Saudi Arabia preserves tradition in a changing society.

Saudi Arabia is evolving rapidly. The past two decades have seen extraordinary economic changes while the system of government remains much as it was when the kingdom was founded 60 years ago. Maintaining the balance between the traditional way of life and the emergence of a modern entrepreneurial society is one of the biggest challenges facing the country in the 1990s. In this issue The Middle East examines the present state of Saudi economic development, with reports from Stuart Arnold and Mark Johnson in Riyadh.

SAUDI ARABIA HAS emerged as a lead player on the world economic stage. It laid out its plans for development on an extraordinarily ambitious scale amid much scepticism in the mid-1970s. Almost 20 years later, it can hardly claim to have fulfilled its far-flung expectations, but it has confounded its critics in the West. Living standards, measured not only in terms of per capita income but also in the quality and availability of health, education, social services and technology, have improved at a staggering rate. This has been accomplished by a country which in 1973 had only a basic infrastructure, limited skills, a small labour force and only one saleable commodity to exploit to its advantage.

Sceptics viewing the kingdom from abroad may still claim that Saudi Arabia has simply spent its way into the major league. With the huge revenues earned from selling crude oil in the 1970s and early 1980s, it could hardly fail to grow wealthy. At home, there is undoubted concern about the impact of modernisation on established values and the coherence of the traditional sense of community.

But the strategy of investing massively in infrastructure and creating the foundations of a productive economy has been justified by events. The big question now is whether, having laid the groundwork for a mature economy, Saudi Arabia can take advantage of the opportunities it has provided for itself.

So long as the economy is underpinned by oil revenues, it is fair to say that domestic demand from private businesses and private citizens will be sufficient to maintain a viable indigenous manufacturing and services sector. The government is determined (sometimes to the irritation of other Opec members) to maintain its share of world oil markets and hence a healthy revenue flow. Budgeted oil revenues, for example, have grown from SR67bn ($18bn) in 1988 to SR127bn ($34bn) this year, according to the National Commercial Bank.

Prospects for the oil sector, diversification in manufacturing, the role of the private sector and the growing sophistication of banking and finance are examined in the following pages. All are evidence of Saudi Arabia's transition towards a more mature economy.

If there is a problem which will need addressing in the not too distant future, it is the state of public finances. Projected budget deficits have consistently run in recent years at $6.5bn to $8bn. Since 1988, the government has studiously avoided depleting reserves and the recurrent deficits have been financed entirely from domestic borrowing through the issuance of development bonds and Treasury bills.

This is unquestionably sensible so far as it goes. Nonetheless, persistence of deficits is a cause for concern. Government liabilities have been estimated at between $50bn and $60bn, although a large proportion of this (possibly as much as half) has been taken up by state institutions, effectively constituting a debt owed to itself.

The fear among some analysts is that the portion of debt generated by selling fixed income securities to the public via the banks will at some stage have an effect on the private sector's ability to invest in its own growth -- which, after all, is one of the government's stated development objectives. Servicing the debt (both to the public and to government agencies) is still manageable, but unless kept under strict control will present a growing burden on public finances in future.

The government has told the IMF that it intends to move towards balancing the budget. So far, it has shown little inclination to implement the policies required to do so. The oil market cannot be counted on to bridge the gap, there is no intention of creating a domestic tax base and expenditure cuts do not as yet appear to be contemplated. Sooner or later, the government will have to come to grips with the problem.

It will probably be later, given the slow pace at which Saudi Arabia approaches major changes in direction. Nowhere is this more in evidence than the studied hesitancy with which constitutional changes are being effected. After much expectancy, King Fahd finally got around to presenting a basic system of government in February last year. This states that the leadership of the kingdom will be vested in the ruling Al Saud family, but adds that the royal succession will be determined on the grounds of suitability.

A majlis al shura, or consultative council, with 60 members will also be set up. Its Speaker, Mohammed bin Jubair, the minister of justice, has been named but as yet none of the members have been selected. The issue is evidently one for much debate within the ruling circle as it tries to reconcile the preservation of the traditional, political and social structure with the changing environment of a rapidly developing economy.
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Title Annotation:Special Report
Author:Arnold, Stuart; Johnson, Mark
Publication:The Middle East
Article Type:Cover Story
Date:Mar 1, 1993
Previous Article:Not wanted.
Next Article:Incentives for diversifying.

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