The challenges of reconstructing Iraq loom large on the horizon. After the dust settles, more than ever before, the focus will be on the basic economic conditions of the Middle East region, and the importance of those economies to the United States. This involves the reconfirmation of long-standing common needs and interests, along with new understandings about what these mean on a map redrawn by political and strategic realities. Central among those needs are considerations for the productive and reliable employment of the national populations that, hopefully, would live-on in prosperity and peace. 

The bottom line, for American and Saudi companies, will be reflected in the shared gains from meeting the challenge of raising the productivity of Saudi workers while at the same time finding how to employ more Saudis. All this is to be achieved at a time when the restructuring of Iraq could present a broad range of new opportunities to existing and new US-Saudi business partnerships. The good news is that this is a process from which all can gain in the billions of dollars of new revenues and investment.

The following essay is about unemployment in Saudi Arabia. It looks at the basics: the demography, macro-economy, and labor market. The source data are from the annual national accounts, the current five year economic plan (2000-2004), and the first official study about unemployment in Saudi Arabia for the basis year 1999. Compared to others across the region, overall Saudi unemployment is low at about 4.3 percent. In 1999, there were are about the same numbers of expatriates and Saudis in the workforce with the Saudis mostly working for government and the expatriates running much of the private sector. The labor participation rate for women is small, and for Saudi women extremely low. But the pressures for change are growing rapidly, with unemployment for the 20-24 age group (the new graduates) at around 27% and 33% for Saudi males and Saudi females, respectively.

It is important to appreciate that the current unemployment situation was not unanticipated. The 1992 Census gave the data about the "oil boom baby boom" that is now coming of age. Concerns about employment are discussed in virtually every segment of the 2000-2004 economic plan. On the national level, the plan aims to create jobs through economic diversification and the growth resulting from greater privatization, liberalization, opening-up, restructuring, and reforming the economy. The plan aims to expand the nation's economic potential as reflected in higher productivity and investment - the only real solution for the long-term for finding needed jobs for young Saudis. As for the labor market more specifically: through a variety of measures the plan progressively restructures the labor market, aiming to reduce reliance on expatriates in the workplace at average rates of 2-3% per year.

To succeed, the plan needs considerable participation and support from the Saudi and international private sector. But then, it is the private sector that will enjoy in the substantial and tangible rewards. The reforms will yield to the private sector the ownership and control of more than half of the economy (up from 42% in 1999). And even the modest shifts in reliance on expatriates will not only absorb the unemployment overhang, but also add some $1-2 billion per year every year to national GDP going forward. This is thanks to the fact that much higher economic multipliers are associated with Saudi households than with expatriate households. Such handsome rewards will not be earned without effort. Companies across Saudi Arabia are looking at their human resources in a whole new way. And the young Saudis are grappling with finding their own value in the workplace, and with committing to the education, training, and experience needed to enhance their value to employers.

American companies have a unique opportunity to participate in this process - while at the same time benefiting from the expansion in Saudi GDP that Saudi-ization will bring. And looking at the regional markets, Saudi Arabia brings unique strengths toward meeting the challenges and opportunities of the new regional business environment. The preponderance of owners and senior managers of Saudi businesses hold American college degrees. For them, American is the language of business, not just that business is English-Arabic bilingual, but also in regard to how the goals and the arrangements that make for good partnerships are conceived and discussed.

American businesses will want to take note of the special talents and networks that the Saudis can bring to new joint regional undertakings. Saudi business is free market oriented in the American sense, unlike most others in the region with their socialist or Ba'athist traditions. The Saudi trading networks lace all across the Islamic world, and are centuries old. They remember trading with Iraq in the days before Saddam, and thus are in the best position to reach back and revive old contacts and affiliations. Just such talents are needed in order to restore rapidly the internal and regional trade and commerce that the new Iraqi economy will very much need. A good memory and other talents for doing business in Iraq and elsewhere in the region is just one example of the value that Saudi human resources can bring to new Saudi-American enterprises.

The reconstruction of Iraq presents American business with unprecedented opportunities - but again, the rewards do not come without effort. In regard to Saudi man- and womanpower, the most required efforts are also the most familiar. Just as they have done so many times before for their own employees, the Americans that partner with Saudis will want to work for steadily rising productivity by effectively tapping the talents of an increasingly trained, motivated and Saudi human resources organization.

Post Script: This all needs a "9/11 awareness" - i.e., a recognition of the common aims and interests that both countries share to detect, deter, and apprehend terrorists and those who would support them. For American businesses considering working with businesses in Saudi Arabia, there are basic confidence and control issues to be addressed. There are the matters of "What constitutes good business practice? What do prospective partners need to know about each other and about their workers? How will the enterprise insure against any possible use or abuse, intended or unintended, of its business activities and assets in support of terrorism?" And similarly in the interest of good commerce, "Will all work together to establish a more effective and intelligent U.S. visa and immigration process, aimed at replacing the current exceptional measures with systems and controls that give even greater confidence?" For more on what the U.S.-Saudi commercial relationship and the subject of having a "9/11 awareness" means toward addressing the basic confidence issues, see the cap-piece for this series: Stakes and Stakeholders in the U.S.-Saudi Commercial Relationship

Myths and Realities about Unemployment in Saudi Arabia
By Kevin R. Taecker

Saudi Arabia's current five-year plan, covering the period 2000-2004, deals extensively with the challenges posed by Saudi demographics and unemployment. Briefly, the plan's demographic data (illustrated below) point to a large 'youth bulge' in the Saudi population. As a result, the numbers of Saudi young people leaving school and entering the job market every year are large and growing every year. The labor market they are entering appears unfriendly in many respects.

During the plan period, there will be little growth in government hiring, and the private sector workplace is overwhelmingly dominated by more or less entrenched expatriates. For every one Saudi working in the private sector, there are four expatriates. The schools are producing male and female graduates in approximately equal numbers with equivalent qualifications, but only 20% of the national workforce are women of which fewer than one in ten are Saudis.

The plan's solution, in a nutshell, is to restructure the Saudi economy in order to find the needed jobs in the private sector - in the near term by replacing expatriates (job "Saudi-ization") and for the long term through greater investment for economic diversification and growth.

According to free market principles, the plan aims to accelerate the expansion and diversification of the private sector by much more generally privatizing, liberalizing, opening-up, and reforming the economy. By providing national treatment and leveling the playing field for both local and foreign businesses and investors, the plan encourages Saudi industries and service providers to enhance their competitiveness. And, through Saudi Arabia joining the World Trade Organization and unifying Gulf Cooperation Council markets, and implementing the Arab Free Trade Zone, the plan would open-up and stimulate new market regions - the better for Saudi businesses to exercise their comparative and competitive advantages in order to extend and expand. Under the plan scenario, by 2005 the Saudi economy will be more than 50% owned and controlled by the private sector, up from about 42% in 1999. Market openings for private businesses appear in virtually every subsector of the economy, including for energy (the natural gas initiative) and government (e.g., the privatization of medical services and insurance).

Economic Dream and Vision

This is a great vision, and strides have already been made toward realizing it. But to the extent that the called-for reforms and market changes have not been accomplished it is also a dream - a dream that is helpful and well-conceived, but still a dream.

The reality is that transforming the Saudi labor market is a daunting task. In effect, it requires every business in the country to reorient and reorganize itself. Complicating matters, until the mid-90's any Saudi needing a job could find one with the government or one of its companies. For all that the 2000-2004 plan has to say about employment, it provides no data directly addressing unemployment. The first publication of national unemployment data, for the year 1999, appeared in September 2002.

Looking at the new data against his own estimates, Brad Bourland (the Chief Economist of Saudi American Bank) characterized the unemployment situation as "a concern, but not a crisis."

Unemployment among expatriates is only 0.8%, reflecting that an expatriate worker's immigration status is entirely tied to a job. Those few counted as unemployed are either briefly between jobs or heading home.

Not covered by the unemployment data are the undocumented expatriate workers estimated to range upwards of 300,000 (10% of documented expats). There are periodic round-ups/repatriations of Hajj over-stayers and others whose papers are flawed. But they work at the lowest ends of the labor market (e.g., heavy day work or as shepherds), outside the formal job market.

Unemployment Myths and Realities

In 1999, the unemployment rate for the Saudi workforce was 8.1 percent, and the unemployment rate for Saudi males was only 6.8 percent - again, levels that are not particularly worrisome by regional comparisons.

However, an examination of the trends and components underlying these figures make clear that unemployment concerns will grow in the future, and for some segments of the job market are already fairly serious.

Saudi women account for only 7.1 % of the workforce. Unemployment among women is reckoned at 16% - more than double the 6.8 % unemployment rate for Saudi males.

However, in 1999 the Saudi female labor participation rate was extremely low at only about 4.5% of the total female population. Although 16% unemployment seems high, the absolute number of individuals affected is small (fewer than 70,000 in a workforce approaching 6 million). The much larger issue relates to the very low female labor participation rate itself, which indicates the Saudi economy functions largely without the benefits of the productivity and income-earning power of its women. Instead, those incomes go to expatriates who remit their earnings home in amounts equaling about 9% of annual GDP ($14 billion of $161 billion in 1999).

The labor participation rate for Saudis in the male population was about 26% -- quite low compared to rates greater than 50% elsewhere in the region. In addition to women not working, the main reasons for this is the youthfulness of the Saudi population where in 2000 some 56% of all Saudis were less than 20 years old. Thus, the Kingdom has a very high Saudi dependency ratio, where in 1999 the Saudis who did not work outnumbered the Saudis who worked by a ratio of 5.7 to one (on average almost 6 dependents per worker). The dependency ratio for expats is only about 0.7 reflecting that most foreign workers leave their families at home, and their spending in the Saudi economy is generally for the most narrow and meager basket of goods and services.

Ball Park Estimating the Real Economic Gains of Saudi-ization

The real economic costs of very low Saudi labor participation rates are magnified by economic multiplier effects. The "all-in" economic multiplier associated with Saudi workers (households) is conservatively estimated at 2.5, meaning every 1000 riyals earned and spent locally by a Saudi worker directly and indirectly produces another 1500 in income as this spending circulates through the economy.

The economic multiplier for expats is fractional, estimated at only around 0.8, reflecting that they send much of their income home. Thus, the multiplier effects lost to the economy from expats holding jobs instead of Saudis is a factor of 1.7.

In 1999, expat annual remittances amounted to about $14 billion. Assuming that expats send on average about ½ their incomes home, this would point to total expat incomes of about $28 billion (17% of GDP). Taking the effects of the difference in Saudi and expat household multipliers into account, the total annual economic costs of relying so extensively on expatriate labor are in the range of $47 billion (1.7 times $28 billion).

Between 1999-2004, according to the plan, Saudi-ization will reduce the numbers of expats in the workforce by about 2 percent per year such that the percentage share of expats in the workforce will drop from 61.3% to 51.6% by 9.7 percent. (This seems conservative in view that many businesses must Saudi-ize at a rate of 5% per year.)

Gauging against the $28 billion of expat income estimated for 1999, the Saudi-ization gain would point to some $2.7 billion of income transferred from expats to Saudis. Thus, by 2004 the economy could enjoy a rise in annual incomes in the range of $4.6 billion (1.7 times $2.7 billion) - thanks to the beneficial economic multiplier effects associated with successful Saudi-ization.

Private Sector is the Winner

The Saudi private sector will be the main beneficiary. The bulk of these effects will be reflected in the form of increased purchases of goods and services from local businesses. The $4.6 billion would represent more than 6.8% of 1999 private sector GDP - a real and substantial reward for doing their part to meet the plan's modest goals.

To participate in this rise in demand, Saudi businesses will need to expand, hiring more Saudis. Thus, there is a virtuous economic cycle implicit in successful Saudi-ization. By leading the economy overall to higher economic multipliers it stimulates business growth and hiring, pushing the economy even higher.

This is the silver lining in what would otherwise appear as the gloomiest aspect to the unemployment report - namely, the very high and rising unemployment rates for those in the 20-24 age group. In this age bracket (which is largely made up of first time jobseekers, e.g., graduates), the unemployment rates for Saudi males and females are in the range of 25% and 33%, respectively.

Sticky Markets

The good news is that there are several hundred thousand young Saudis available to move into jobs as they open-up. The bad news is that, unlike smoothly flowing capital or commodity markets, labor markets are sticky. Once hired employees tend to want to hold on to their jobs and employers tend to keep them. Making a change requires overcoming considerable inertia, and the changes called for with Saudi-ization are nothing short of structural for many Saudi businesses. To make the changes successfully will require Saudi businesses to rethink the importance of human resources to their enterprises.

Expats earn much less than Saudis. For those holding high school diplomas or better, the average monthly compensation to expats is only about one-half that for Saudis. Among university graduates, for example, expat monthly compensation is about $1,500 versus $2,900 for a Saudi. But these are broad averages that count long-time jobholders the same as new entrants. From the perspective of the businesses considering Saudi-ization, the more important indicator is the marginal wage rate, i.e., what the new hire will accept, not what all those already on the payrolls presently earn.

In keeping with its strong free market orientation, the Saudi government has wisely refrained from attempting to dictate private wage levels. Thus, to the degree that Saudi labor is oversupplied in the market the wage demands of Saudi jobseekers will come down. Although marginal wage levels are not yet reported, there is plenty of anecdotal evidence to believe this is happening. And both at the margin and across the existing workforce, rising government fees and tightening immigration requirements are adding to the costs and difficulties of employing expats rather than Saudis. So the actual difference between what it costs to hire a Saudi over an expat is smaller than the difference between their average wages, and this difference is shrinking.

Saudi businesses must also consider the issues surrounding worker productivity. A trained and experienced expat appears to have more to offer than a Saudi just out of school. While this might be for the very short-term, for the long-term just the opposite is the case. Even though many stay for a lifetime, by definition all expat workers are temporary. They leave when their services are no longer needed or they meet their own personal work and savings goals. Thus the businesses that rely on expats have little reason to invest in the productivity of their workers - e.g., for training and education.

Stagnant Productivity

Other Miscellaneous Myths

These are the realities about the Saudi labor market. The companies that Saudi-ize effectively and anticipate what Saudi-ization will mean for national income and spending have much to gain - as would any American partners who contribute to and participate in this process.

But there are also many myths. These are the myths that portray Saudis workers as unstable, ill-suited, unwilling, or somehow incapable of doing the work that needs to be done. There is the myth that Saudis lack a work ethic, and the myth that Saudi schools produce graduates that are unprepared for the jobs that need to be done. Also a myth is the notion that Saudi workers' expectations are hopelessly mismatched to what businesses need and have to offer.

The anecdotal evidence that supports these myths is more an indication of labor markets in transition than any reflection of underlying or fundamental weakness.

As those who have actually hired and managed Saudis can attest, where the opportunities are present, the Saudi work ethic is alive and well. Moreover, Saudi Arabia's young people have the same free market instincts as their elders. They know how to find the market-clearing price for their labors. They understand what education, training, and experience can do to enhance their market value. As for the basic skills and knowledge, Saudi schooling is perfectly adequate. Indeed, compared to their peers within and outside the region, many of the graduates from top schools are quite good.

But schooling is not just about book knowledge and academic skills. If there is a failing in the Saudi education system, it lies in the area of workplace acculturation - again the sort of shortcoming that is symptomatic of transition. The need to diligently and systematically replace expatriates in the workplace is a very new phenomenon. Until the mid-1990's, expatriates were the only option that many employers had to fill job openings because there were simply too few Saudis in the workforce. Only recently have Saudi businesses begun to demand that the Saudi educational institutions play greater roles to instill the workplace manners and ethics needed for successful Saudi-ization in their own businesses.

Upon dissection, some of these myths appear for what they are - forms of racism, bias, and discrimination. Today's imperialists and pundits from the West share in a long tradition of doubting Arab capabilities and discounting Arabian achievement. Any characterization that would detract from Saudi workers as a group without differentiation must be eyed with suspicion. The oft-repeated canards about a Saudi "population time bomb" and the "brewing of chronic joblessness" are of this ilk.

The reality is that the Saudi labor market is going through a long-anticipated and planned for transition. The process is extensively supported by the government - through the general education program and a growing number of specialized programs.

For the businesses operating in Saudi Arabia - those that must Saudi-ize - the good news is that successful Saudi-ization in many respects brings its own rewards. These rewards result from improving the mix of the economic multipliers that apply to Saudi and expat households in the national economy. And even greater rewards are promised thanks to the productivity gains which the businesses that invest effectively in Saudi-ization can enjoy.

At the margin, the costs of hiring a Saudi vs. an expatriate are converging. In increasing numbers Saudi businesses are coming to terms with the changes they need to make in order to begin to fully take account of and receive the benefits from their human resources. In the process, they are getting a grip on what it will take to become strong and competitive - locally, regionally, and globally.

In closing, this whole situation presents special opportunities for the American businesses that participate in the U.S.-Saudi economic relationship. For reasons too numerous to list, America businesses are the unrivaled leaders in the field of worker productivity. Some say this reflects the effective application of free market principles; others that this is a sign of the flexibility, resilience, and freedom from bias that characterizes the American approach to life generally - itself a reflection of the benefits America enjoys from its own melting pot traditions.

Whatever the reasons, Saudi businesses are looking for help in tackling the productivity issues imbedded in the efforts to Saudi-ize. Real and substantial rewards await them if they succeed - the rewards associated with the nearly $5 billion per year of new household spending that is possible from the economics of improving the structure of the workforce by 2004.

They also stand to profit in the broader outlines of the national plan, which by 2005 would deliver more than half the economy into private sector hands. The American companies that join in and participate stand to benefit through sharing in these substantial gains -- gains made possible through the restructuring of the Saudi labor market.

From 1990-1999, he worked at the Saudi American Bank (SAMBA) in Riyadh, for 4 years heading SAMBA's Treasury Customers Division which provided foreign exchange and money market products and services to Saudi Arabia's 300 leading companies and private investors. He headed SAMBA's initiatives to develop Saudi Arabia's financial and capital markets, contributing to the normalization, diversification and deepening of the government securities market, and launching the London-listed Saudi Arabia Investment Fund (SAIF - the Kingdom's first offering to global portfolio investors). From 1995-99, he served as SAMBA's Chief Economist, and is well known among stakeholders in the U.S.-Saudi commercial relationship for his critical and constructive speeches, articles, and initiatives in support of private sector-led investment and growth in the Kingdom.

From 1988-1990, he served as the U.S. Treasury Department Financial Attaché for the Arabian Peninsula Region based at the U.S. Embassy in Riyadh. From 1978-88 he was Treasury's senior world energy market analyst and Economic Desk Officer for the Arabian Peninsula based in Washington. In 1977, Kevin worked as a research associate for Argonne National Laboratory's 'International Energy Development Program." From 1972-75, he served as an officer in the U.S. Coast Guard, teaching college-level History and International Relations at the USCG Academy in New London, CT.

Kevin holds academic degrees from the American University School of International Service (BA-1971), l'Institut d'Etudes Politique (CEP-1971), and Johns Hopkins University School of Advanced International Studies (MA-1977). With his wife, Barbara Lyn, he helped to found and from 1980-88 resided at and managed the Ronald McDonald House of Metropolitan Washington - a charity serving the practical needs of seriously ill children and their families.

ALSO BY KEVIN TAECKER

STAKES AND STAKEHOLDERS IN THE U.S.-SAUDI COMMERCIAL RELATIONSHIP