A Rentier Social Contract: The Saudi Political Economy since 1979

Originally posted October 2009

The year 1979 was the last year of the pivotal decade in which the Saudi economy took its modern shape; no other decade before or since has seen more change. The patterns of oil-driven politics that emerged at the time still define the Kingdom’s political landscape today — even if some of the players in the political game have subtly shifted their roles.

Oil income increased 25 times from 1970 to 1979. The ambitions of the Saudi state, the all-dominant agent of change during the boom, grew in lockstep. Under the technocratic leadership of Crown Prince Fahd, the previously small and poor Saudi government expanded rapidly and soon appeared to be everywhere. By 1979, when oil prices were on the way to their second peak after 1974, oil sector government together accounted for 65% of Saudi economic activity and government drove 63% of total investment in physical assets — a rate otherwise only reached in socialist economies.

State expenditure continued to grow at a rapid pace into the 1980s, and the bureaucracy rolled out public services at a record pace: Electricity generation increased from two billion kilowatt hours per year in 1969 to 44 billion in 1984. The supply of desalinated water grew from practically nil to 350 million gallons per day over the same period. The total length of paved roads quadrupled.

Soon the state’s reach extended to virtually all Saudis, usually to their delight. Heavily subsidized public utilities, state employment, and free education and healthcare guaranteed the comforts of middle class life for increasing numbers of nationals in a country where less than a generation ago life for many had been a daily fight for survival.

The paternal-distributional state not only brought material comfort, but also had a profound effect on political life. It is no coincidence that the few oppositional stirrings the Kingdom had witnessed in the 1960s largely stopped in the 1970s. The omnipresent state used its resources to buy off potential opponents and envelop society in ever-expanding networks of formal and informal patronage. Patronage was not new to Saudi politics, but never before had it reached all strata of society. By 1979, the rentier social contract, in the making since the 1940s, had come to define national politics.

Sectors of society that used to drive Saudi Arabia’s modest development became appendices of the state. The Saudi merchant classes, which had once funded the country’s first schools and power generators, and bankrolled the ruling family, were reduced to the role of rent-seekers or, at best, service providers for the state. Although the nimbler among them amassed untold riches, they did so as intermediaries, contract brokers, and rent-seekers in the orbit of the state, and often by the grace of the princes at the center of it.

The merchants were looked upon benevolently, but played at best an auxiliary role in the Saudi government’s outsize development plans. The largest industrial and infrastructure projects in the 1970s were all controlled by the government itself, in the face of a business sector that lacked expertise, managerial structures, and the capacity for long-term planning. While remaining staunchly capitalist, the Saudi economic system was utterly dominated by the state — an oddity in the annals of international development.

A closer look at Saudi economic development in the last decade shows that the 1970s boom arguably constituted an exception in Saudi history itself. In 2009, after six years of the new oil boom, the Saudi economy is in many ways a more ordinary creature than it was 30 years ago. Although the state remains oil-financed and business cycles are broadly linked to oil prices, the private sector plays a much more substantial role in development.

Having experienced 15 years of stagnation after the oil price crash of the mid-1980s, the Saudi government has used its post-2000 oil riches much more cautiously, saving a considerable portion of its additional oil income. While its coffers had been depleted in the period to 2000, and its bureaucracy stagnated, Saudi business had used the lean years for consolidation and the gradual accumulation of resources, which, different from the government, it was not forced to spend but could continuously reinvest. While some business groups went under with the oil bust, others gradually diversified and started serving private, rather than state, demand.

The new boom has given renewed importance to government investment — but different from last time, private capital formation remains one and a half times larger than that of government. Private business, moreover, is increasingly involved in providing education, health care, and infrastructure through public-private partnerships in water, power, and transport facilities. Despite record oil prices, government has not rescinded its commitment, first articulated in the austere 1990s, to delegating increasing responsibility to national business. The private sector continues its return into fields it used to dominate in the pre-oil era. At the same time, large Saudi groups have emerged as leading cross-border investors in the Arab world and beyond, and are voicing their policy interests in Saudi Arabia in an increasingly organized fashion.

Does this mean the end of the rentier social contract? By itself, no: For all the strides of business, the economic situation of the average Saudi remains quite similar to that in 1979. State employment of nationals remains high — by some estimate twice as high as private employment — public services remain subsidized, and networks of princely patronage are still an essential feature of daily life. The government has backpedalled repeatedly on attempts to curb subsidies, and has used the recent boom to increase social security payments and public wages.

Organized politics remains largely absent in Saudi Arabia, a country without a national working class, and with a middle class that is largely state-dependent. While business has evolved, society at large remains locked in place. And to be sure, the relative increases in private sector autonomy have not tempted any of the big Saudi capitalists to organize politically. State-business negotiations remain strictly focused on business issues.

While the Saudi economy in a strict sense has changed a good deal, the Kingdom’s political economy remains the same in 2009 as it was in 1979. Neither government nor business seems to have much reason to complain about it.