Introducing Reforms and Confronting Extremists

Despite the violent conflicts, instability and uncertainty that continue to afflict the Middle East, Saudi Arabia, the region's most powerful state, will celebrate its national day later this week in a mood of confidence and optimism.

Last month King Abdullah completed his first 12 months as ruler, following the 23-year-long reign of his brother Fahd. It has been a year notable for the smoothness of the transition of power.

Although Abdullah, as Crown Prince, had effectively ruled the kingdom since 1995 when Fahd suffered a stroke, his formal enthronement as the Custodian of the Two Holy Mosques – the role from which the ruling Al Saud family derives its authority – clearly represents an exciting but challenging new era for the kingdom. And it is one likely to be marked by an increased pace of economic, political and social reform.

In economic matters, under Abdullah's guidance Saudi Arabia has liberalized its trade policies, enacted new regulatory laws governing competition, opened up to foreign investment and increased at least a degree of transparency. A “business friendly” tax code has also been introduced and financial services have been liberalized.

Until recently, foreign businessmen and women had to receive an invitation from a Saudi before they could make a business trip to the kingdom, a requirement that re-enforced the country's insularity. But the Riyadh government has now dispensed with this hindrance.

“The kingdom is open for business and is fostering an environment friendly to international trade and investment,” says Prince Turki Al-Faisal, the influential Saudi ambassador to Washington.

Just four months after Abdullah's enthronement, the reforms he has overseen enabled Saudi Arabia to become the 149th member of the World Trade Organization after 12 long years of negotiations.

Among other measures adopted, the kingdom has opened its services sector to foreign participation and committed itself to protect intellectual property. Trade barriers have already been dismantled in the telecommunication, information technology, pharmaceutical, civilian aircraft and chemical sectors.

These steps are expected to further enhance the climate of economic transformation. A good example of this is the approach that has been adopted by Saudi Post, the state-run mail service. It has instituted an extensive series of measures to modernize its operations, with the aim, says its president Dr Mohammed Saleh bin Zaher Benten, of having it running as efficiently as a private company before offering it to the market.

“Membership of the WTO reassures foreign investors that Saudi Arabia's laws and regulations are in line with international standards,” says Amr Al Dabbagh, governor of the Saudi Arabian Investment Authority (SAGIA).

The impetus for reform has been aided immensely by an economic boom, spearheaded by the high price of oil that continues apace. The kingdom will earn more than $203 billion in oil exports this year, an all-time record. It will be 25 percent more than last year's record of $162 billion, according to the Samba Financial Group, the country's largest publicly-traded bank.

As a result of this continuing windfall, the kingdom, noted mostly for its cautious approach to change, has embarked on an ambitious program of reform and modernization. Economic development is one of its cornerstones. The primary purpose is to provide the country's 27 million population with increased opportunities to improve the quality of their lives and, particularly, to provide employment for the young generation. With high population growth and many young Saudis unemployed, the need to expand the non-oil economic sectors is receiving serious attention.

At present there are no less than 37 new mega-projects underway in a wide range of industries. They include oil and gas production facilities, refineries, chemical plants and real-estate ventures.

The total cost of projects that are either already being built or are in an advanced stage of planning is about $283 billion. Development projects related to the oil and gas sector account for a quarter of that sum. Defense and security projects will cost $48.8 billion, while large real-estate developments will account for $40 billion, followed by mining and minerals development ($11.9 billion).

In the opinion of Brad Bourland, Samba's general manager and chief economist, the boom is only beginning. There are signs, he says, that strong oil prices and revenues will last many years, producing a fiscal position for the Saudi government that should ensure growth through to 2010 and enable the financing of many more mega projects.

The kingdom produces 9 million barrels of crude oil every day - more than 10 percent of world production.

As it is, even with the extraordinary range of large scale developments being undertaken, the oil revenues are not being spent as quickly as they are being earned. Of the roughly $17 billion per month in oil-export earnings, about $7 billion per month is accumulating as foreign assets at the central bank.

One of the most striking reform measures has been the Riyadh government's determined campaign to encourage private sector involvement in the country's economic development, instead of retaining state control. In contrast to previous spending sprees in the kingdom, only just over 30 percent of the required funding for future projects will come from the general government budget.

At present, investment opportunities that will be generated over the next two decades are currently costed at $700 billion. The single largest private sector sum – $26.7 billion – is being invested in the development of an industrial and financial complex to be known as the King Abdullah Economic City, which is to be built on a greenfield site north of Jeddah on the Red Sea coast.

Conceived as a catalyst to attract foreign investment and increased global trade, commerce and industry, the new city is expected to create up to half a million employment opportunities in the various industries and service-oriented companies that will operate there.

Together with its bold infrastructure developments, social and political reforms are also on the Riyadh government's agenda.

Extremist tendencies within the kingdom have evoked great concern. Since a triple suicide bombing in Riyadh in 2003, the government has cracked down on al-Qaeda militants and the religious scholars who have supported them publicly.

The authorities have also taken note of the dangers of distortions in religious instruction and the need to equip young people with an education broad enough to cope with the contrasts between their traditional culture and the influences of Western culture.

To meet these demands, the government has instituted what it describes as a long-term modernization of the kingdom's educational system. Critics have complained that Saudi schools promote intolerance of other religions, but teacher-training is being overhauled and new text-book and curricula introduced. Furthermore, a scholarship program is being developed that will send Saudi students abroad for further education.

Prince Turki says this program will enable young Saudis to receive a world-class education, make friends and build new bridges of understanding.

In political matters, ground-breaking reforms began last year when Saudi men were allowed to vote in municipal elections, an unprecedented event. More elections are planned with the aim of giving more Saudis a direct say in decisions that affect them. The prospect of the vote being extended to women is also being widely debated, as are other measures affecting the role of women in society.

Some Saudis are impatient for rapid change, others demand a more cautious pace, while a third group remain resistant to any change at all.

The challenge facing King Abdullah and the ruling family is to maintain equilibrium between these varied desires.

By Michael Knipe