Mary Svenstrup, MPA
The Kingdom of Saudi Arabia has been relatively unaffected by the Arab Awakening. So far, the government has been able to maintain stability by cracking down on protests while simultaneously providing generous handouts to appease its citizens. Saudi youth, however, are growing increasingly dissatisfied with their government because they cannot find employment. And as recently seen in Egypt, Tunisia, and Yemen, a dissatisfied youth population has proven to be an important factor contributing to instability – and, ultimately, regime change.
Employment has significant cultural implications in Saudi Arabia and the Arab world: it is an essential prerequisite for marriage and transition to adulthood. Without employment, youth are stuck in social purgatory, feeling restless and unsuccessful. Yet Saudi Arabia has the highest youth unemployment rate in the Middle East and North Africa region excluding Iraq.
The Saudi government’s answer to youth unemployment is “Saudization,” a policy that sets employment requirements for Saudi nationals. This policy has been ineffective because it does nothing to address the underlying issue that Saudi graduates do not have the skills demanded by private companies. Furthermore, this policy disincentivizes non-hydrocarbon sector growth, which is critical to create more jobs in the Kingdom. The Saudi government should scrap Saudization and instead focus on education that will build skills for employment.
Structural Barriers to Employment in Saudi Arabia
Saudization is an artificial employment requirement that does not address the structural problems with the Saudi economy that contribute to youth unemployment, such as an overreliance on the hydrocarbon sector, a constantly growing social transfer system, and insufficient private sector growth.
Saudi Arabia’s economy is largely based on petroleum, but the hydrocarbon sector is not a reliable source of job creation. Oil and gas comprise about 45% of fiscal revenues, 55% of GDP, and 90% of export revenue – yet, the national oil company employs less than 1% of Saudi labor force. The hydrocarbon sector does create a source of revenues for the government’s generous social transfer programs; these programs, however, may not be sustainable, crowed out other social expenditures, and most of all, do nothing to address unemployment. As an example, in lieu of real social reforms, the Saudi government introduced new fiscal initiatives on February 23 and March 18, 2011 to quell domestic protests. Although these types of social transfers may help to immediately pacify the population, the IMF notes that these programs will require oil prices sustained higher than $90 per barrel for the next several years. That may not be sustainable and puts a huge burden on the Saudi government to control oil prices.
Given the problems created by reliance on the hydrocarbon sector for employment, the non-hydrocarbon sector of the Saudi economy is critical. This sector, however, has not been able to create enough jobs for Saudis. Over the next five years, the IMF estimates that private sector non-oil GDP will need to grow by 7.5% annually to create a sufficient number of employment opportunities for the domestic population. While Saudization addresses the issue that most private sector jobs are being allocated to more qualified expatriate workers, the policy increases the operating costs of private companies in the Kingdom, thereby reducing incentives for investment and hindering non-hydrocarbon growth. For example, a recent equity research report by EFG Hermes suggested that Saudi companies will meet Saudization requirements in the near term by hiring more Saudis rather than reducing the number of expatriates, given the skills mismatches of Saudi workers. Basically, companies are being forced to increase personnel costs simply to satisfy a legislative mandate.
Furthermore, both the appeasement tax and Saudization may have a feedback loop creating more pressure on the government. As Saudis become wealthier and more connected to the rest of the world, their expectations for employment and inclusion in the economy will continue grow. Higher expectations combined with growing dissatisfaction with unfulfilling employment opportunities will further increase the government’s cost of appeasement. Therefore, creating sustainable economic opportunities for its citizens will mitigate the long-run fiscal burden of providing appeasement handouts and remove the need for Saudization, as long as Saudis have the skills necessary to be competitive employees.
Education for Employment
The underlying cause of youth unemployment is that, even with a postsecondary degree, Saudi graduates lack the right skills for jobs in a modern, knowledge-based economy. The Saudi education system itself has flaws, but a main problem is that students choose to study subjects that have no direct linkages to labor markets. For example, in 2008, 40% of university students in Saudi Arabia were concentrating in arts and humanities (versus averages of 20% and 17% in Asia and Latin America, respectively), while only 24% chose to study science or engineering. Furthermore, there is a social stigma against technical and vocational training, and any type of university degree, even one that is very unlikely to lead to employment, is socially viewed as superior.
To reduce youth unemployment—and the risk of social instability in the Kingdom—the government ought to at least address skills mismatches by orienting the education system toward private sector employment opportunities. Ideally, Saudi Arabia should scrap Saudization and instead focus on making their graduates competitive employees. Forcing graduates to compete for jobs will ensure that they choose education tracks that are conducive to employment. Additionally, technical and vocational programs should be associated with prestigious universities and fellowships, which would alleviate some of the social stigma of choosing this track. Lastly, the government should adopt a national quality assurance framework to regulate private education companies doing business in the Kingdom to ensure that degrees and certificates are uniform across the country. These changes, paired with continued investments in upgrading the overall education sector, should help to link skill-based post-secondary education with employment opportunities.
Encouraging youth to select education for employment will result in more qualified workers that will naturally increase the demand for Saudi workers and ultimately reduce the cost of doing business in the country. The government and the royal family should act quickly on this issue, for their own sake and for the sake of the growing youth population in their kingdom.