KASP and the Saudi economy

Saudi

For most of its existence, Saudi Arabia's economy has been driven by revenues from its massive oil fields. While this has allowed the country to have a healthy balance sheet, it has also discouraged investment in other areas. Other countries in the region have begun to realize that having an oil-dependent economy is not sustainable in the long run. Nations with burgeoning populations and limited resources tend to be unsustainable. That lack of sustainability can be seen today in milder forms, such as high unemployment among youth, social problems like abuse and deviant behaviour and stunted economic growth.

The facts concerning the Saudi economy reflect the structural issues in the Saudi economy. The country has a population of roughly 27 million, a third of whom are non-citizen immigrants. Nearly 50% of these are under the age of 25 and the median age is 26.4 years. This means that the country has a very young population, and will need to provide economic opportunities for these young people in the very near future. Saudi youth in general, however, lack the education, training and technical skills to make them useful to the private sector (CIA World Factbook, 2014). This leads to high youth unemployment and social problems. Additionally, such unemployment creates a drag on the Saudi economy. The government has initiated a number of strategies intended to reduce unemployment among Saudi nationals, and to improve the diversity of the Saudi economy. At present, however, it remains heavily dependent on the oil and gas sectors. The official unemployment rate among Saudis is 12.1% (Fleischaker et al., 2013), but unofficial studies indicate that the rate is much higher. Youth unemployment is believed to be in the range of 30% (Ibid). Female unemployment is a critical problem as well, despite rising rates of female enrollment in higher education. Around 70% of university-educated women are unemployed in Saudi Arabia, creating a tremendous gap between the country's actual economic potential and its economic performance.

The government has become active in sending students abroad. This strategy is intended to make up the gap between the needs of Saudi industry and the capabilities of its citizenry. This foreign education is a response to the generally low quality of education at home. If most Saudi youth lack the skills needed to compete against foreign workers for the better jobs in the economy, and the same youth are unwilling to take labour jobs, this creates a drag on the economy. Foreign educational institutions are seen as the solution to the limitations of the domestic education system.

This paper will study the problem of unemployment in Saudi Arabia from a couple of different perspectives. The first is that it will examine the relationship between unemployment and economic performance. The second is that it will examine some of the major issues in addressing the unemployment problem. Education will be examined, including the impact of foreign education on the Saudi economy. Female labour force participation will also be examined as a potentially important factor in improving the Saudi economy. Lastly, some attention will be given to overseas remittances, as Saudis sometimes stay in the country in which they were educated in order to pursue the opportunities there.

Unemployment in the Kingdom

There are a variety of statistics reflecting the unemployment situation in the Kingdom of Saudi Arabia (KSA). The basic unemployment rate is only around 5.8%, in line with many nations of the developed world. The unemployment rate among Saudis, however, is considerably higher at 12.1%. This can be further subdivided by gender, where the unemployment rate among men is around 7% for the total population, but among women it is over 35%. Educated women in particular suffer from extraordinary unemployment, in the range of 70%. From this we can conclude that education is a barrier to employment for many Saudi women. Young Saudis fare especially poorly in the labor market, with unemployment rates around 30% for the 15-29 age cohort. This drops dramatically as adulthood progresses (Fleischaker, 2013).

The trend of unemployment among the younger Saudis may reflect a number of different issues. The first is that the economy simply cannot create enough jobs in order to keep up with the growth in the population. As noted, the median age of the country is 26.4, which is quite young, and half the nation's population is under the age of 24. This creates tremendous dependency for those who are of working age, if jobs are not created for these people. Total Saudi employment as a percentage of population peaked around 2001 at 48%, but has since declined to just over 42% (Fleischaker, et al., 2013).

One of the things that has to be understood about the Saudi economy is that there are almost two distinct economies within the Kingdom -- the Saudi nationals' economy and that of foreigners. The recent drop in employment among Saudi nationals illustrates this phenomenon clearly. In 2010 and 2011, total job creation spiked to over 10%, the strongest job growth in years. However, the number of new jobs for Saudi nationals as a percentage of job growth declined. In 2009, over 60% of new jobs were for Saudis, but in 2010 that number declined to around 15%. New jobs were created, but for foreigners. With the large number of Saudi youth entering the workforce each year, this led to a decline in Saudi employment.

Education and Ennui

There are essentially two issues relating to youth unemployment in Saudi Arabia. The first is that Saudi youth are not considered to be qualified for a lot of the new jobs that the Kingdom creates. The second is that Saudi youth typically do not pursue the low-end labour jobs that drive much of the foreign worker economy. The oil sector remains the largest employment sector, but the positions fit into one of these two categories. If Saudis are unqualified for technical work and unwilling to perform labour, they find themselves unemployed. Only when they become older, with families to take care of, do they begin to find sufficient employment opportunities.

Motivation is tricky to tackle, but ultimately the mismatch between skills and need will drive motivation. People need to feel that there are opportunities for them to improve their lives in order to generate motivation. That is where education comes in, and the government has significant control over education. There are a large number of Saudis who have only a secondary education. This leads to the situation where many roles that require higher education are filled for foreigners, who have the necessary Bachelor's or higher qualification.

The Kingdom has been building out its education system since its inception. In the first couple of decades of the KSA, there were no tertiary education institutions in the country, and it was therefore a necessity that students would study overseas. There has been a strong focus on building out the education system in recent years. Since the late 1970s, the country has gone from seven universities to 23 universities. Other initiatives have increased the number of teachers' colleges, and encouraging the growth of private universities so that they now number 33, which more being added frequently. Despite this growth, the tertiary education system still has a shortage of qualified instructors, which lowers the quality of education offered. Thus, some 70,000 Saudis study overseas, making the KSA the fourth-ranked country in the world for overseas students behind China, India and South Korea. The most important destination countries for Saudi students are the United States, the United Kingdom, Australia and Canada, all English-language nations with large and respected university systems (Alamri, 2011). The Saudi government has also undertaken sponsorship to help students attend private universities at home, in order to both open up more opportunities for Saudis and also to keep more students at home.

The King Abdullah Sponsorship Program (KASP) is the centrepiece of education reform in Saudi Arabia. Since 2005, an estimated $5 billion has been spent on scholarships for Saudis to either study overseas or to study at private institutions operating within Saudi Arabia (Thomas, 2013). The program was designed to fill in the gaps between the education system in the kingdom and the demands of the modern economy. With a domestic education system often criticized for its emphasis on religion over science and economics (McDowall, 2012), sending students overseas was seen as a means of getting Saudi students a modern education, bypassing the conservative bureaucracy entrenched in the domestic education system.

Gender Issues

Gender is one of the major issues in the gap between education and economy in Saudi Arabia. In general, the better-educated a population is, the more that population will be able to drive economic growth. Cultural tradition in Saudi Arabia, however, struggles with the idea of women in the workforce. The country has made tremendous gains in the number of females who attend university, but this has not translated so much to economic participation. In 1980, it was highly unusual for a Saudi female to receive a tertiary education. Today, the percentage of tertiary education students who are female is around 40%, a rate that ranks above other countries on the Arabian peninsula and is more in line with North African countries and Malaysia (Fleischaker, 2013). This improvement in female participation in higher education should in theory be a boon to the Saudi economy.

The reality is that educational opportunities for Saudi women are good, but economic opportunities are poor. While unemployment among Saudi women with a secondary education is around 20%, unemployment among Saudi women with a tertiary education is closer to 80%. This contrasts with the experience of women in developed nations, and even in other Muslim nations such as Kazakhstan, Indonesia and Turkey, where education unlocks opportunity for women.

The issue of women's economic opportunity is important in the context of high unemployment in the nation. That so many women with good educations are excluded from the workplace means that the country has a wasted asset. While it is hard to dispute the value of educating women, there needs to be follow-through in the economic realm. The more educated, intelligent people are in the workforce, the higher the rates of innovation and productivity will be. The country is creating this economic potential and then letting it go to waste. Having more educated people in the workforce does not increase unemployment, it creates jobs, because greater innovation means more businesses are started and existing businesses perform better, enabling them to expand. Both of these things create jobs.

Overseas education is shifting the cultural norms with respect to women in the workplace as well. While significant impacts have yet to show in the official statistics, it is worth remembering that changes to education policy are relatively recent and it will take time for these impacts to appear. But anecdotal evidence suggests that attitudes towards women in the workplace are changing. Whereas lesser-educated Saudi women were able to find work in firms run by family members, many Saudis who study overseas are bringing back some cultural norms from their experience. Many Saudi women who study overseas prefer to seek employment when they return home. As the numbers of these women grow, it becomes more acceptable in Saudi society, among their families and friends, to work outside the home and without family supervision. One of the major drivers of success in regards to shifting cultural norms is that government scholarships under the new plan are being offered to all students based on ability. Thus, even students from middle class or poor families are being granted the opportunity to become exposed to the wider world. The results, if this evidence holds as a trend over time, will transform many of the key issues that have held back the value of these programs in the past. More Saudi women -- and more men as well, from less-privileged classes -- will not only have the education needed to drive economic growth in the future but will have the opportunities as society adapts to more global values with respect to bringing young, poor and female workers into the workforce in roles for which they are educated (McDowall, 2012). The government has assisted in this by encouraging and sometimes funding the development of pathways for women returning with foreign degrees to find work in the kingdom, such as glowork.net, a job-finding portal, and career fairs that take place in the country's major economic centres (Thomas, 2013).

Economic Growth Factors

Engaging as much of the workforce as possible is critical to sustained economic growth in the KSA. Having so many women and so many young people without meaningful employment harms the Saudi economy. The petroleum sector accounts for 45% of the country's GDP, 90% of export revenues and 80% of budget receipts (CIA World Factbook, 2014). The rate of growth in industrial production is slow, at 2.7%, and this is mostly tied to the petroleum industry. In general, Saudi Arabia lacks productive capacity outside of petroleum. The problem with this is that while petroleum has been good for the country, it is not sustainable. Eventually, petroleum supplies will run out. But long before that, the country continues to face high levels of unemployment and a complete lack of economic diversity.

Currently, non-oil economic growth in Saudi Arabia is correlated significantly with government expenditure. Given that government's budget is driven by oil revenues, there is a clear relationship that can be understood. Given the high level of involvement of government in the Saudi economy, the use of oil revenues should be directed as driving non-oil GDP growth, with an eye to encouraging economic diversification. In the long-run, government can stimulate growth by encouraging private domestic investment and total expenditures (Alshahrani & Alsadiq, 2014).

It is worth noting that evidence is not yet available for the role that foreign-educated students will play in spurring economic growth in the future. Education reforms took place in 2005, and the results of these reforms will be seen only when the foreign-educated students return home and become actively involved in the economy (Ibid). There are two caveats to this. The first is that these students are at this point unlikely to become actively involved in the economy if they are women. Female economic participation is so low much of the new education policy and many of the foreign students returning will not actually be able to contribute much to the economy. Pathways need to be available for educated Saudi women to contribute to the Saudi economy. It is not unreasonable to expect that many might remain overseas, where they can take full advantage of their education. Degrees from the four target countries are highly portable around the world, and given the choice between a fulfilling career overseas and a traditional Saudi life, many women with a degree are likely to choose the former. There may be some residual impacts from remittances in such cases, but this is nevertheless a drain on Saudi Arabia's productive capacity to have so much potential go unused.

The second caveat is that the youth unemployment rate remains stubbornly high. With adequate technical training, perhaps youth returning to Saudi Arabia will be able to find meaningful work sooner than their less-educated counterparts. However, the role of private direct investment has to be taken into consideration here. Returnees bring with them skills, but there are limited opportunities to pursue entrepreneurial activity. The Saudi economy remains tightly controlled. Recent policies to open the economy have included the creation of "economic cities" that will allow freer foreign direct investment (FDI), but even these often rely on government to provide "all technical, administrative and financial services" (Saudi Gazette, 2014). While incubation of entrepreneurs is usually welcomed, the high degree of government control even when encouraging entrepreneurial activity contrasts with the free economies of the four target overseas education destinations.

The reality, however, is that private direct investment is so critical to spurring economic growth in the kingdom because such enterprises are 92% of the businesses and represent 80% of total employment. In many instances, small enterprises can also leverage the capabilities of educated Saudi youth and women even given Saudi traditions, as entire families can become involved in the management of such businesses. More often, however, women are empowered by their foreign experiences, which allow them more responsibility than they would have at home, and they return home with desire to implement more of these freedoms into their daily life, including in the economic domain such as working in businesses with no family supervision (Hausheer, 2014).

Foreign education, too, plays a key role in driving private direct investment. Hamod (2010) notes that "talented men and women are pushing the envelope in their respective communities and challenging longstanding assumptions about value creation and risk aversion in the Arab world." It is reasonable to assume that foreign universities in countries with strong entrepreneurial cultures are going to teach those values to Saudi students to a much greater degree than those students would learn at a domestic university. The arrival of many foreign tertiary educational institutions to Saudi Arabia in recent years will also bring those same values of risk-taking and innovation to Saudi students who remain at home. Recall that the government is subsidizing the education of many Saudis at these private institutions, in addition to the students to study overseas.

Measuring Economic Impacts

Fleischaker et al. (2013) looked at a number of economic variables that can be used to measure the changes to the Saudi economy arising from KASP. One outcome of KASP is that now young Saudis are returning with higher educations that make them more qualified not only for technical work, but work in health care and for entrepreneurial work as well. This should result in improvements to a number of key metrics, including Saudi employment, youth employment, female employment, new Saudi jobs, and new business creation.

Saudi employment is a subset of employment for the total of Saudi Arabia. Overall unemployment in the kingdom is at moderate levels, but Saudi unemployment has been persistently higher. The KASP program encourages Saudi youth to gain the skills and education that they will need to fill the technical jobs for which foreign talent is currently being used. Thus, Saudi employment as a percentage of total Saudi Arabian employment should increase over time. Further, the unemployment rate among Saudis should be lowered as a result. More young Saudis and female Saudis in particular should be able to acquire employment in their 20s, reducing unemployment rates among these groups.

KASP is expanding annually, and some reports have current figures at 145,000 Saudi studying overseas. The total Saudi labour force at present is 8.42 million, and 80% of this is comprised of foreign nationals (CIA World Factbook, 2014), implying that the Saudi labour force is around 1.684 million. The unemployment rate for Saudis is around 12.1%, implying 204,000 unemployed Saudis. The 145,000 figure would be divided by four to reflect the normal degree length, so that there would be around 36,000 Saudi graduates returning each year with degrees. If these 36,000 get jobs right away instead of being unemployed, that could conceivably lower the unemployment rate among Saudis back to around 10%, so the potential impacts of KASP on the Saudi unemployment rate are significant.

It is worth noting that the 12.1% Saudi unemployment figure only includes men. Knowing that women face a much higher rate of unemployment, the actual overall figure for all Saudis who wish to be in the workforce is much higher. This means that the impact of KASP will be reduced, because it represents a much smaller pool of labour.

There are other constraints on the potential impact of KASP on the Saudi unemployment rates. The first of these is that at least half of KASP recipients are women, and women still face substantial barriers in gaining employment upon their return. While there have been societal changes in recent years that indicate women might have an easier time gaining employment upon their return, the sky-high rates of unemployment among university-educated Saudi women suggest that significant barriers to employment still exist. Until these barriers are all but eliminated, KASP will be less effective than previously stated.

Another constraint to the impact that KASP will have on the Saudi unemployment problem is that there are still significant barriers, both structural and cultural, to entrepreneurship. While small- and medium-sized businesses employ 80% of Saudis, the environment for risk-taking and innovation is not nearly as great as it is in the foreign study countries. Saudis may consider starting their businesses elsewhere. There are certainly challenges for young Saudis to create their own companies -- the barriers all but ensure that serious entrepreneurial activity will require the participation of older family members. Given that many KASP recipients come from poor and middle-class families, their talents may not be optimized. It is worth remembering that entrepreneurial activity has a multiplier effect on job creation. Small businesses create jobs not just for their owners but for dozens or hundreds of other people as well. The KASP strategy is a good starting point, but clearly it will be more effective at reducing unemployment among Saudis if it is implemented in concert with other structural reforms that encourage small business growth.

There is yet another consideration that could constrain the effectiveness of KASP on reducing Saudi unemployment. Unemployment has a numerator and a denominator, so even if KASP students return and find work right away, the actual unemployment number may not change much, given the demographics of the country. The median age and age cohorts make the case that there is an explosion of youth in Saudi Arabia. Many are still student age, and will be entering the workforce. There are nearly 9 million Saudi citizens under the age of 24, and jobs will need to be found for all of them within the next couple of decades. This is where the multiplier effect of entrepreneurship becomes important, because KASP will not be able to provide training and employment pathways for all of them. Even though the program has expanded every year since its inception, the population of people of working age continues to grow -- there are very few Saudis over the age of 60 (CIA World Factbook, 2014). The country must therefore create hundreds of thousands of new jobs every year just to maintain the current rate of unemployment. Indeed, when Saudi job creation slipped for a couple of years, the Saudi unemployment rate jumped two points. KASP will only truly lower the unemployment rate if there is a multiplier effect from university-educated returnees creating jobs for their lesser-educated compatriots, which given the cultural norms probably means creating decent, well-paying white collar jobs that normal Saudi youth would be willing to accept. Thus, there are quite a few variables that are critical to KASP being able to lower the unemployment rate.

The impacts of overseas education on GDP are going to be significant less than the impacts on unemployment, at least in the short run. In the short run, petroleum will continue to dominate the Saudi GDP, and by and large the value of petroleum to the country's GDP is going to be driven by factor other than overseas education. The Saudi government, by virtue of its prominent position within OPEC and OPEC's ability to influence the global price of petroleum, clearly has a significant effect on its own GDP, which was pretty much the point of OPEC in the first place. But at 40% of total GDP, petroleum will in the short run continue to be the driver of GDP in Saudi Arabia.

To illustrate this, consider what the economic impact of 35,000 new returnees will be under an optimistic scenario. Under such a scenario, where structural changes allow almost all of them to find work, and they all by virtue of their premium earn a premium on the average Saudi wage, the impacts are minimal. With an assumption of SAR 150,000 average annual starting salary, the equivalent to U.S.$40,000, and that this is all new benefit to the economy and incremental to the alternative of unemployment, this total benefit would be $1.4 billion. This represents an improvement on the Saudi GDP of 0.15%. The current GDP growth rate is 3.6%, so these new graduates on their own will not increase the Saudi GDP by any meaningful amount. Again, for there to be any significant impact to the GDP from the KASP program, the Saudi economy must enjoy a significant multiplier effect, the conditions for which are coming, albeit slowly.

In the long-run, however, the effect of an entire generation of Saudi students learning overseas should be that the economy of the country is restructured away from petroleum. While twenty or thirty years hence petroleum will still be the most important driver of the Saudi economy, it is hoped that by developing a more capable workforce, Saudi Arabia can lessen the dependence on petroleum. As other parts of the economy grow, the impact of KASP returnees will become more evident. As more of them enter into government, policies will also become more open. As a long-run strategy, KASP has the potential to be far more effective than it will be in the short-run. The long-run effects of the education strategy are difficult to quantify, as some of the new industries and opportunities that will eventually help the economy transition have not yet been uncovered, let alone be exploited.

Foreign Returns

Another factor that should be taken into consideration with overseas students is that these students are contributing to a small Saudi diaspora. Students may well choose to remain in host countries, or use their highly-transferrable degrees to settle elsewhere, where their newfound skills and abilities may be better maximized. This seems more likely among poor and middle-class students, who will still face significant challenges in starting businesses when they return home. While Saudi Arabia has a net migration outflow, much of this comes from former immigrants, rather than Saudi nationals, as the result of crackdowns on immigrants who are violating terms of their immigration (The Economist, 2013). Estimates show that there are just over 7000 Saudi-Americans, and this is the destination for half of all KASP students. Records from Canada, Australia and Great Britain do not differentiate between Saudis and other ethnic Arabs, but Saudis do not figure among the major immigrant groups in any of these countries. It can be surmised from this that there is not a significant amount of foreign remittance from these expats. Saudi Arabia is a major source of remittance money on account of its large foreign labour base, but it receives relatively little from its own nationals. The leaders among remittance inflows in the MENA region are Egypt, Lebanon, Jordan, Morocco and Tunisia, all nations with substantially larger diasporas than that of Saudi Arabia (Saudi Gazette, 2013).

There is another way that Saudi nationals abroad can influence the Saudi economy, and that is through fostering trade. One of the most important outcomes of attending foreign universities is that Saudi students can make connections in other countries -- their target countries are four of the world's largest and most powerful economies -- and use those connections to develop trade markets when they return back home. Given that 90% of export revenues are related to petroleum, it is important to develop other avenues of trade. There is a lot of opportunity here, because currently there is trade with the United States, but none of the other countries in which Saudis go to study. Bolstering trade connections with the English-speaking world and with Europe is something that Saudi Arabia in general needs to do much more of in order to reduce the dependence of the economy on petroleum revenues.

There are hundreds of billions of dollars of potential trade opportunities. Saudi Arabia can conceivably act as a bridge between the wealthy industrialized nations and other countries in the Muslim world. There are ties already between KSA and India, Pakistan, Indonesia and other sources of immigrant labour. Acting as a link between nations is something that Saudi Arabia can do well, if its people are trained in Western schools, but retain close ties throughout the Muslim world. This model has been followed already in a number of Arab countries, with varying degrees of success. Saudi Arabia is playing catch-up, and will ultimately compete with these countries, but its size and vast oil wealth give it a legitimate opportunity to enjoy strong economic growth as the economy slowly restructures away from all-petroleum to a more diversified economic model.

Saudis who choose to remain overseas are a small number at present, and in part this is by design. Over time, the kingdom will benefit from allowing more of its citizens to work overseas, as they will be able to work in trade, banking and technical industries alongside people from other nations. They will bring with them to these roles strong ties to Saudi Arabia. Evidence from other diasporas shows that people who emigrate often create critical trade links. Studies have shown that immigrants to nations like Canada, the UK and the U.S. create trade links with their home countries, to the mutual benefit of host and home nation (Girma & Yu, 2002). The same can be expected when Saudi Arabians begin taking up important positions in business overseas. They will create the links needed for Saudi Arabia to increase its trade, diversify its export base and grow its economy. At present, Saudi suffers a lack of these links and therefore this has a limiting effect on foreign trade potential for Saudi firms.