Sometimes the cure is worse than the ill: an occasional look into the life of LSE DESTIN 2010

Why Saudi Arabia Fails? An Elusive Quest for Counterfactual

Endogenous Institutions? Saudi Arabia fails to prosper today not because of its adverse geographic endowments (i.e. oil): oil itself is a neutral factor and there are countries which were able to make the best out of it. Saudi Arabia failed to create prosperity for large segments of the society because through extractive political institutions the ruling elite was able to use the oil revenues to its liking while suppressing the growth of other, more dynamic sectors such as industry. This was the thesis developed in the first post. This thesis bears a question: why Saudi Arabia ended up with such repressive political institutions? America’s Kingdom, Mythmaking on the Saudi Oil Frontier lends some weight to the thesis that institutions were shaped by the conditions of Saudi Arabia i.e. oil and its geostrategic importance. This point is important because if conditions shape institutions then institutions only transmit the causal effects of these conditions. It follows that institutions cannot be the only explanatory factor because they are endogenous and cannot be singled out against the backdrop of the conditions in which they arose[1]. A cursory look at the oil economy’s role in the formation of political institutions can be revelatory.

The squalid living conditions reserved to the Saudi workforce, the differentials in salaries along racial divides, the unwillingness to insert Saudis workers in more advanced positions, all these factors prompted a waves of oil workers strikes in the late 1950s. The strikers went as far as asking right to labor unions, a constitution and a representative government. ARAMCO’s intelligence unit provided to Saudi security the names of the agitators and the labor movements protests were beheaded and crushed. The example of labor agitations shows how demand for more participatory form of politics and economy did not square well with the paramount importance of oil security: movements which aimed to reform and liberalize the political and social arena were a threat. Oil and its security for ARAMCO and for the ruling dynasty provided both the rationale and the means to crack down on protests. Conditions (oil and its security) determined what institutions were possible in Saudi Arabia at that time (see first post).

The Deal (source nicholsoncartoons.com.au)

Path Dependence: Why Saudi Arabia’s Institutions Do Not Change? Extractive political institutions were far from deeply rooted and the attempt by petroleum minister Tariki and other Saudis liberals to open up the political space stands witness to the fragility and contingency of such institutions.

The second reasons of Saudis institutions persistence is connected to the rise of Nasserism and Washington’s paramount interest in securitizing Saudi’s state to counter Egypt’s weight in the region. Eisenhower was convinced by the idea that king Saud could be a rival regional leader to Nasser and was ready to offer a deal: oil for security (in the forms of weapons and military support). However, Saud decided to side with Nasserists and reformists and as a result Washington shifted its support to the rival crown prince Faisal who ousted Saud in 1964. Faisal engineered a welfare state which promised prosperity to the Saudis subject and was backed by the US: political and social reform could wait as oil security and stability of a friendly regime were to be prioritized[2]. The sequence of events in Saudi Arabia shows that institutions such as constitutions and representative parliament are only possible under certain circumstances: the spread of Nasserism and Saudi’s reformers threat to nationalize Saudi oil (thus impinging on US’s oil security) were not conducive conditions. But if certain institutions are only possible under certain circumstances how one can say that they are the primary source of a country’s prosperity? Are they not just endogenous and therefore not dissociable from the conditions under which they function?

(source thecomicnews.com)

What Counterfactual? To tease out the effect of institutions on Saudi’s prosperity today one would need to observe a country which had extraordinary reserves of oil and was faced by an external threat (such as Nasserism at the time for Saudi Arabia) but ended up with more inclusive institutions. If this country was better off that Saudi Arabia then one could conclude that political institutions do matter. Yet history did not offer such counterfactual and therefore one is left with little to gauge whether institutions matter more than the conditions under which they can (or cannot) function (oil, US interests, external threat).

Such line of thought has very practical policy implications: if inclusive institutions are only possible under certain circumstances then as long as these conditions do not mute inclusive institutions cannot materialize. If, in other words, Saudi Arabia’s stability continues to be paramount for the US in the region (with Iran today replacing Nasserism as the external threat), if the country continue to play the role of swing power with its abundant supply of oil, and if the oil revenues continue to fund a capillary welfare state then one cannot expect any change on the political arena: institutions reflect a power which lies somewhere else. Conditions however are not immutable (Saudi Arabia might be approaching oil peak by mid-century) and with a change in conditions institutional liberalization might follow suit.

[1] This argument draws on the thesis developed by Przeworski in “Institutions Matter?” and “The Last Instance: Are Institutions the Primary Cause of Economic Development?”

[2] These two principles together with counterterrorism constitute the pillars of the US-Saudi deal today.