Saudi Arabia's International Business Law and Foreign Investment

Saudi Arabia's Socioeconomic Landscape

Oil wealth, which led to dramatic increases in the standard of living in the Gulf for much of the second half of the twentieth century, is no longer sufficient to ensure the prosperity of several states. Living standards in Saudi Arabia, Bahrain, and Oman have remained at a standstill in recent years. For example, from 1980 to 1998, the Saudi economy grew at an average of only 0.2% per year — a stagnation that ended only when oil prices soared in 1999 and 2000.

Gulf regimes have failed to diversify their economies beyond the oil sector. Oil dominates the Gulf economies, leaving them vulnerable to sudden price fluctuations. Approximately 40% of Saudi Arabia's GDP, and over 90% of its export earnings, come from oil revenues. Many industries depend heavily on subsidized energy, as well as direct and indirect government subsidies, to survive. Oil prices are predicted to average around $21 a barrel (in 1998 dollars) in the coming decade (Powell, 2009) — a price that will not bankrupt the Gulf states but will not be enough to solve the economic problems of Saudi Arabia, Bahrain, and Oman in particular (Al-Ghamdi, 1999).

The Gulf states suffer from a number of weaknesses that inhibit growth outside the oil sector. All Gulf states spend heavily on government salaries, and investment levels are low compared with other developing economies (Bjerke & Meer, 2003). The state dominates the economies of most Gulf states (Powell, 2009). Over half of the workforce in the Gulf is employed directly by the state. Even outside the oil sector, governments often dominate electric companies, hotels, banks, telecommunications, and other sectors (Au, 2007).

Barriers to Economic Advancement

The remarkable energy reserves in the Gulf have hindered economic diversification in the region. Both outside and domestic investment focus first on the energy sector. Moreover, the surge in oil prices led to rapid increases in the prices of non-tradable goods, which in turn led local manufacturers and merchants to concentrate on the lucrative domestic market rather than on developing globally competitive industries. Investments in energy have produced few positive externalities that could encourage the growth of other sectors of the economy (Bjerke & Meer, 2003).

Corruption and ruling family involvement in the economy are additional problems. Interviews with area businessmen and U.S. officials in the Gulf indicate that connections with the ruling family are often required for any major business venture. In Saudi Arabia, royal family members are increasingly demanding a share of private business transactions, whereas previously they had confined their role to the state's oil sector and government-directed activities (Bjerke & Meer, 2003). Although solid information on the amount spent on the thousands of royal family members is lacking, a common estimate is that each Saudi prince receives about $3,000 per month, with senior princes receiving far more. Opposition groups claim — no doubt with some exaggeration — that 40% of government revenues go to the royal family (Au, 2007). The lack of transparency in the Saudi economy only fuels speculation and inhibits foreign investment. Government spending on the royal family, on defense, and on other sensitive matters is seldom disclosed (Al-Ghamdi, 1999).

Education systems in the Gulf are inadequate and do not produce large numbers of skilled workers, although they have advanced significantly from thirty years ago, when many states lacked a comprehensive education system and much of the population was illiterate. Moving much beyond basic literacy, however, has proven a difficult step (At-Twaijri, 2002). Moreover, roughly half of Saudi Arabia's graduates hold degrees in subjects related to Islamic studies, leaving them unprepared for the modern job market. Too often, graduates of Gulf schools are not trained to think critically and are largely innumerate.

The Gulf states are also heavily dependent on expatriate workers. Salaries for menial jobs are low, and many Gulf state citizens consider manual labor beneath them. The poor education system, however, has hindered efforts to replace high-skilled foreign labor with local workers. As a result, efforts to replace expatriate workers with locals — "Omanization," "Saudization," "Bahrainization," and similar programs — have not proceeded at a rapid pace (Looney, 2004).

As a result of these economic problems, unemployment is growing. Saudi Arabia's unemployment rate is estimated at 14% and is steadily increasing. Bahrain and Oman probably suffer similar unemployment rates (Looney, 2004). Unemployment is likely to increase further in the coming years as a result of rapid population growth. Saudi Arabia, Qatar, Oman, and Kuwait all had estimated population growth rates in 2000 of over 3%, rates they had sustained for several decades (Powell, 2009). Over half of the Saudi population is under 18. The economy currently creates enough jobs for only 40,000 of the 110,000 who enter the job market each year (Looney, 2004). Brad Bourland, the chief economist at the Saudi American Bank, noted that job creation in Saudi Arabia "has not been keeping up with labor force growth over the past decade" (Powell, 2009). The Kingdom needs a job growth rate of over 6% merely to keep pace with its increasing population.

Steps Toward Economic Reform

Foreign Investment Options

Several Gulf states are moving fitfully in the direction of economic reform. Bahrain has tried to portray itself as a regional financial center, and Oman has tried to encourage foreign investment. Most notably, Saudi Arabia has taken several steps in the right direction. The Saudi government used the recent boom in oil prices to improve its overall fiscal strength rather than simply increasing spending. In September 1998, Saudi Arabia invited U.S. — and later European — energy companies to submit proposals, reversing years during which foreign direct investment in energy had been discouraged. In addition, the Kingdom adopted a privatization strategy, approved a foreign investment law, opened its stock market to foreign investors, and took steps to stimulate tourism, among other changes. It also moved to adhere to World Trade Organization (WTO) regulations and to streamline regulations for companies operating in the Kingdom (Ali & Al-Shakhis, 2008).

How far the Gulf states will go down this path remains unclear. The surge in oil prices has reduced pressure for reform. So far, regional states have not made a significant effort to sell state assets, a key component of any meaningful reform. Moreover, state monopolies and ruling family members with ties to the patronage-driven economy oppose significant change. The thousands of ruling family members also enjoy a range of free or subsidized services — perquisites that rulers will find difficult to cut.

Impact on the Social Contract

If reform does not succeed, the social contract in several Gulf states may begin to fray. Even as regional economies have stagnated, the expectations of citizens have risen. When oil prices were high, Saudi and other Gulf state leaders forged a bargain with their peoples: the regime would provide a high level of services in exchange for political loyalty, or at least passivity. Governments today, however, cannot provide enough jobs, advanced educational opportunities, or other benefits, and the economies are not sufficiently diversified to offer adequate opportunities in the private sector.

Gulf youths today expect more from the government than their parents did, even as they receive less. Most Gulf residents under the age of 30 — easily more than two-thirds of the population — grew up accustomed to a high standard of living. They continue to expect high-quality health care, housing, and other services that their parents never knew as children. Furthermore, many have received higher degrees, increasing their expectations of high-status, high-paying employment (At-Twaijri, 2002). As a result, many Gulf residents consider jobs involving physical labor unacceptable and believe it is their right to hold an undemanding, high-paying government job. If regimes cannot provide such largesse, the population is likely to become less supportive and more critical of their governments.

Rules and Regulations of Foreign Investment in Saudi Arabia

For foreign investment to be permitted into Saudi Arabia under the current laws, there are substantive and technical requirements that must be satisfied at the outset (Al-Ghamdi, 1999). Once these requirements have been met, a foreign investor will be at liberty to claim the available protection measures and may also enjoy certain incentives.