A recent report in The New York Times [The New York Times (14 July 1996).] describes the Saudi economy as being "near collapse." There is probably an element of journalistic hyperbole in the description, but it is abundantly clear that dis ruptive forces, economic and other, are becoming stronger in Saudi Arabia. Amongst other things, the report notes the high rate of unemployment and other problems which make the situation "ripe for unrest." A Reuters dispatch [Jerusalem Post (10 July 1996).] asserts that the challenge faced by the Saudi leaders is to find more jobs and maintain the generous welfare system. The Saudi princes, estimated to number between five and ten thousand, "are immune to the hardships faced by others." A repo rt in The Financial Times [Financial Times (11 July 1996).] states that the annual allocation from the treasury to five thousand Saudi princes is $8 billion, absorbing about one fifth of Saudi Arabia's annual oil export revenues. In other w ords, the extended royal family, and others close to the royal family, continue to enjoy very high incomes, while many or most Saudis are suffering from declining living standards. The report quotes an unnamed "senior government official" to the effect t hat "most of the extremists . . . now come from poor families." Presumably they are recruited by organizations opposing the regime, including those responsible for the bombing of the American bases in Saudi Arabia in November 1995 and in June 1996.

Between 1982 and 1989, and again since 1992, the population has grown faster than the economy, i.e., the growth rate of GDP per capita has been zero or negative. The almost inevitable result is increased unemployment and depressed incomes. The authoriti es are encouraging the private sector to hire more Saudis since the government cannot afford to continue financing more make-work jobs in the bureaucracy. However, university graduates and other Saudi youth expect the government to continue with its long -time policy of providing them with white collar office jobs as it has done for the past twenty years, if not longer.

Few Saudis have the necessary skills to replace foreign technicians, mechanics, and other skilled workers. There are also many millions of unskilled workers in Saudi Arabia from various poor Arab and Asian countries. But menial jobs for Saudi university graduates, and even for high school graduates, are considered demeaning. The result is rising unemployment for Saudis, especially for youngsters just entering the job market. According to some estimates, unemployment among Saudis has reached 20% and is climbing as the economy stagnates. [Jerusalem Post (10 July 1996).] These high unemployment levels stand in sharp contrast to the three million foreigners employed in Saudi Arabia, many skilled and professional, but about half unskilled. [There a re six million foreigners in Saudi Arabia. I estimate that half of them are workers and the remainder accompanying family members.] These expatriates are employed overwhelmingly by the private sector, and despite strong official pressure to hire Saudis, only 7% of private sector employees are Saudi nationals. [Jerusalem Post (10 July 1996); Economist Intelligence Unit, Country Report-Saudi Arabia No. 2 (1996), p.21; Middle East Economic Digest (5 April 1996), p.56.]

In order to understand the current state of the Saudi Arabian economy, it is first necessary to review quickly its status since the late 1960s. Saudi Arabia incurred deficits (both budgetary and in the current account of the balance of payments) in the l ater 1960s and, again, in the later 1970s. But these were relatively short term, each period lasting about two years. The deficits were readily covered by the utilization of previously accumulated reserves; no debts were incurred. Each time exogenous e vents extricated the Saudis from their financial embarrassment. Both in the early 1970s and again between 1979-81, a sharp rise in the demand for Saudi oil combined with far higher world oil prices. As a result, Saudi oil export revenues skyrocketed fro m a "mere" $4 billion in 1972 to $111 billion in 1981. As a result of these two factors, Saudi deficits were soon forgotten—viewed as a temporary aberration. As revenues went up, the authorities sharply increased public expenditures, inevitably raising imports of both goods and services. In the Saudi case, imports of services means primarily payments to foreign workers and to foreign contractors operating in Saudi Arabia.

OPEC surpluses disappeared almost as quickly as they appeared. Oil prices peaked in 1981, eroded and then fell sharply, especially when measured in constant (inflation-corrected) dollars. Oil discoveries outside the Middle East raised non-OPEC oil suppl ies almost steadily, helping to depress oil prices. In 1983, Saudi Arabia incurred a deficit (both budgetary and balance of payments). In response, however, the authorities did little to cut public spending, seeing the deficit as a temporary aberration. They believed that they could easily cover the anticipated deficits by utilizing part of the financial reserves accumulated during the "Years of Plenty". But contrary to expectations, deficits persist to this day, and by 1987 most of the financial rese rves had been exhausted in order to cover the deficiencies.

Subsequently there were sharper cutbacks in the "projects" budget, basically investment in infrastructure, as well as for housing, health and educational facilities. Since construction was mainly done by foreign contractors with a labor force that was al most completely foreign, the authorities felt that cutbacks in the projects budget would have only a minor effect on Saudi nationals. They also severely cut back aid to the poorer Arab states from seven to less than one billion dollars per annum by the l ater 1980s, and even less by the mid-1990s. But military outlays and various current expenditures, including a wide range of free health and educational services, and numerous other subsidies, as well as the burgeoning and bloated civil service, were har dly touched for fear of public reaction. The authorities were politically unable to impose more drastic cutbacks, especially in view of the large allocations to the royal family (as noted above). Further tying the hands of the regime were a host of "com missions" collected by the royals and those close to them, for their services in obtaining government contracts, especially on behalf of foreign companies.

The Gulf War and its aftermath made a bad financial situation even worse. Budgetary as well as balance of payments (current account) deficit,s which had persisted in every year since 1983, rose sharply during 1990-91. Thus the cumulative budgetary defic its for the years 1983 through 1994 were $165 billion, of which $38 billion was incurred during the Gulf War. The cumulative deficits since 1983 greatly exceed the cumulative budgetary surpluses between 1971 and 1982: about $100 billion. The trends in t he balance of payments are similar. Since 1987, Saudi Arabia has been borrowing heavily, mainly domestically, in order to cover the deficits.

The projected budgets for 1995 and 1996 indicate that the authorities are trying to muddle through without taking any drastic measures to cope with the deficits. According to an IMF report, the domestic debt as of the end of 1994 was almost $100 billion, the equivalent of 77% of the Saudi GDP. The IMF mission projects that by the year 2000 the deficit will rise to the equivalent of 110% of GDP. This would crimp the ability of private commercial banks to lend to the private sector. [The New York Time s (30 June 1996).]

The Saudis appear to be praying for higher oil prices and increased demand for Saudi oil in order to extricate themselves from their financial dilemma. However, longer term trends indicate lower oil prices, especially when measured in constant dollars. [ See Kanovsky, above]. This does not rule out temporary fluctuations due to weather, as was the case in the winter of 1995-96, or the current uncertainty regarding the resumption of Iraqi oil shipments. Indeed, although there may be digressions from the trend due to wars, revolutions, weather, etc., the underlying trend of real oil prices is constant at most, and more probably trending downward.

If significant growth in oil export revenues is not in the cards, what about the chances for significant cutbacks in expenditures in order to balance the budget? The constraints the Saudis face are formidable, including their fear of their two powerful n eighbors, Iraq and Iran; it is this security concern which underlies the drive to acquire more and more sophisticated and expensive military equipment. The fear of internal revolution—possibly aided by external enemies—explains why Saudi Arabia maintains what amounts to two parallel armies, the regular armed forces, under the command of one prince, and the National Guard, under the command of another. Such duplication is highly costly. The Persian Gulf War of 1990-91, and the imminent threat to the Sau di regime, provided an additional stimulus to the Saudi drive to expand and modernize its armed forces. But there are other factors accounting for the huge orders of military equipment mainly from the US and also from the UK. The New York Times [ The New York Times (30 June 1996).] reported that "Prince Abdullah has been struggling to rein in military spending . . . [but] his efforts have alienated family members aligned with [Prince] Sultan, who have much to lose financially if new project s do not go forward." The commissions and kickbacks earned by those near the seat of power are a powerful deterrent to cutbacks in military spending. And this is also true of civilian expenditures.

Thus, Saudi ability to cope with the financial crisis is greatly inhibited by: (1) the drive to increase military spending; (2) the opposition to sharper cutbacks in subsidies (which entail higher prices for water, fuel, electricity, etc., and fewer gover nment handouts such as free health care and educational services); (3) the pressure to create more make-work jobs for Saudi graduates and reduce their high level of unemployment; and (4) the voracious financial demands of the royal family.

Will Arab-Israeli peace agreements attract foreign investors to Saudi Arabia? Hardly. Other than the oil sector, including petrochemicals, there has been little foreign private investment in Saudi Arabia. In fact, total foreign private investment in Sa udi Arabia fell sharply from $1.9 billion in 1990, to only $106 million in 1994. Trends were similar in other Arab oil states. [The International Herald Tribune (8 April 1996).] Unofficial estimates of Saudi private wealth held abroad are about $ 100 billion—not including the royal family. [Jerusalem Post (29 May 1996).] This probably indicates a lack of faith in the stability of the regime. Given the magnitude and nature of their problems and the political, social, and economic constraint s, one can understand the skepticism of the potential Saudi and foreign private investors with respect to investment in Saudi Arabia.

While Arab-Israeli peace is desirable in its own right—even without economic benefits—such an eventuality will hardly affect the Saudi economy. What the financial crisis in Saudi Arabia has done is cause the state sharply to reduce its aid to poor Arab c ountries as well as reduce the job opportunities available to the nationals of the poor Arab states. What the financial crisis has also done is compel the Saudi authorities to stretch out payments to American and British arms suppliers. No new arms orde rs of significance have been placed in the US in the last few years. [The New York Times (30 June 1996).] Three cheers for lower oil prices.