“What’s the Arabic for Thatcherism?” asked an Economist editorial, written to accompany the magazine’s interview with Mohammed bin Salman, Saudi Arabia’s deputy crown prince.
Prince Mohammed suggested that a wave of privatisations and asset sales, including a partial stake sale in Saudi Aramco, was on the cards.
This excited the British editors of The Economist, who imagined they saw in Prince Mohammed a burgeoning Thatcherite.
Margaret Thatcher, the proselytising champion of free markets and a smaller state, believed that shrinking the public sector was a moral duty. Although she never said it out loud, she very likely believed that the public sector was inherently inferior to the private sector.
It’s quite a stretch to interpret Prince Mohammed’s role as that of a reforming free-marketeer, for several reasons.
Saudi Arabia is considering asset disposals and is cutting spending because it doesn’t have a choice. If present conditions hold, it will deplete its financial reserves in less than a decade. It must create millions of jobs for its fast-growing, youthful population. It ran a deficit of 15 per cent of GDP last year, and is tapping international bond markets for the first time in its history. And oil prices are set to scrape lows of somewhere between $10 and $20, if you believe the major investment banks. For a country with a break-even that is a large multiple of the oil price, the choice is stark: embrace cuts and sell assets or run out of cash.
The kingdom aims to keep oil prices depressed to stop investment in new production capacity elsewhere. The greater its ability to weather economic malaise at home by keeping government spending going, the longer it can maintain its oil market strategy. Privatisations are a tactic to support the oil market strategy. For Thatcher, privatisations were the strategy.
Saudi Arabia is the classic example of the rentier state – and nothing that Prince Mohammed is suggesting would change that. Rents from oil are distributed to the population. That is why 450 billion Saudi riyals (Dh440.78bn) in the budget was put aside for public sector salaries, an increase against the previous year in a supposedly austere budget. Perhaps Prince Mohammed would like to see public sector salaries fall. Believe it when it happens, and not a moment before.
We don’t really know the scope of Saudi intentions, or the extent of their political willpower. There are very good reasons to doubt that the government will make good on its vague promises to tax consumption through VAT, for instance. The kingdom’s government departments have not yet learnt how to stick to spending targets.
The Saudi government in the 1980s, faced with an oil price at a similar level in real terms, cut infrastructure spending first, protecting public sector salaries. In its 2016 budget, for all the rhetoric of change, the government did exactly the same thing – spending on transport and infrastructure fell by two-thirds, while salaries remained untouched.
Thatcher was fond of saying, incorrectly, that there was no alternative to her policies. In Saudi Arabia, there is no alternative to state spending. The government remains the prime motor of the economy. The public sector accounts for just under 60 per cent of GDP. The private sector is only a few degrees removed from the government – as the IMF says, corporate profitability remains heavily dependent on government contracts. This isn’t a good thing. But the kingdom has squandered its 10 years of plenty, according to Bassam Al Bassam at Saudi Arabia’s Institute of Public Administration: despite having 10 years of high oil prices, the kingdom has made very little progress in terms of economic diversification. Privatisations may help, by attracting more foreign capital to state-run industries – but they will be insufficient to wean the country off of oil.
The Economist is projecting its ideological hopes on to the deputy crown prince. It is fantasising that Thatcherism means something in the Gulf. That is a peculiarly British example of wishful thinking.
Adam Bouyamourn covers economics for The National