VI. THE DRIVE FOR AGRICULTURAL SELF-SUFFICIENCY

While the economic diversification plans put the greatest emphasis on industry, large sums were also allocated to the development of modern agriculture. According to Saudi planners, the rationale for heavy spending on agriculture was the "strategic significance of increasing domestic food production for a growing population." In addition, they argued that a focus on agriculture "contributed to import substitution and helps to prevent population drift to the urban centers. Evidently, the "strategic" importance of "food security" (the terms used by the planners for agricultural self sufficiency) stemmed from the fear that food exports to Saudi Arabia might some day be cut off by Western countries in order to pressure Saudi Arabia to change its oil policies, just as the declared Arab oil embargo of FY1973 was designed to influence Western policies.

To achieve agricultural self-sufficiency, the Saudi government invested heavily in developing water resources, storage facilities, and other infrastructure, and provided very generous subsidies to producers. These subsidies included half the cost of irrigation equipment; 30-50 percent of the cost of imported farm machinery, equipment, and other inputs; the cost of transporting cows from abroad by air freight; interest-free loans; and a government decision to maintain high procurement prices that were often multiples of international prices. As planned, this manipulation of the agricultural market led to a rapid growth in agricultural production. With relatively modest spending in the 1970s, average annual growth was 6 percent; when subsidies and budget allocations were hiked considerably in the late 1970s, the average annual growth rate of farm production rose to an extraordinary 12 percent in the 1980s. Preliminary estimates for the early 1990s indicate that there has since been a slowdown in the rate of growth.

By far the most spectacular expansion was in wheat production. In addition to all the above-mentioned subsidies, in 1979 the government announced that it would buy wheat from the farmers at six times the price of imported wheat, including transportation to Saudi Arabia. In effect, the government offered to guarantee domestic wheat growers huge profits. Wheat production escalated from 142,000 tons in FY1979 to over 2 million tons in FY1984, more than twice domestic requirements. Storing all this excess wheat itself became a huge logistical and financial problem, and in addition to the massive drain on the treasury, finally persuaded the government to reduce the procurement price in the mid-1980s from six to three times the international price. But since the world price of wheat had declined during the latter half of the 1980s, the gap between the local and international price remained very wide. Between 1985 and 1991, wheat production doubled again to 4 million tons, much of which was bought by the government and given to some of the poorer Arab countries as foreign aid.2 In 1991, the government paid $2.1 billion to the wheat farmers for a crop valued (internationally) at less than $500 million. This does not include the cost to the treasury of all the other subsidies noted above, nor the provision of massive supplies of water for irrigation at virtually no cost to farmers. According to one estimate, taking account of the price paid to farmers plus the direct and indirect subsidies, the Saudi government paid the equivalent of ten times the price of imported wheat for domestic wheat.

Similar methods enabled the Saudis to achieve self-sufficiency in other agricultural products. Under the stimulus of very high prices paid to the farmers and a host of other subsidies, production of eggs and dates rose substantially, leaving a small exportable surplus. Significant gains were also made in the production of meat, poultry, milk, fruits, vegetables, and other cereals in addition to wheat.

All this spending on agricultural development, however, did not leave Saudi Arabia self-sufficient in food. In fact, as spending on "food security" rose, spending on "food imports" rose with it. Food imports rose from $300 million in 1972 to $1 billion in 1976 and then jumped to over $5 billion in 1981, where they remained for the first half of the 1980s. Several factors contributed to the rapid growth in food imports: the growth in population, including the influx of millions of foreign workers; rising income levels; and increases in international food prices until 1980. A decrease in world food prices in the 1980s helped pare the Saudi food import bill from $5 billion annually in the early part of the decade to an annual average of $3.5 billion in the second part of the decade. Additional factors that helped cut the import bill were related to the economic recession in the kingdom, including a fall in incomes.

Despite the rapid expansion in local farm production, there is no indication (at least since 1985) that food imports have dropped. The U.S. Department of Agriculture (USDA) expressed the view in 1986 that there was little prospect of a significant decline in the volume of Saudi agricultural imports. In fact, USDA's predictions were conservative; food imports actually rose from $3.2 billion in 1986 to $3.8 billion in 1991.

Food security was not the only rationale for massive spending on agriculture. Another important objective was to stem the rural migration that had fueled a large growth in the Saudi urban population by offering generous subsidies to the farm sector. Despite large-scale government investment, however, this goal was not realized either.

Saudi labor force estimates are not considered very reliable. This is particularly true for the agricultural sector, and even more so of those (mainly nomads) engaged in traditional agriculture. Official estimates show that agricultural employment (in the traditional and modern sectors, including both foreigners and nationals) rose from 426,000 in FY1974 (28 percent of total employment) to 650,000 in 1986 (16 percent of total employment). Subsequently, according to official estimates there was a sharp decline to 569,000 in 1989 (10 percent of total employment). Such a sharp decline in so short a time is not very plausible. All one may conclude is that there was a significant drop in agriculture's share of total employment, though the magnitude of the change is uncertain. Despite planners' best efforts, Saudis were not taking up-or staying in-farming.

A further economic drain caused by efforts to achieve "food security" is the negative value-added in agricultural production in terms of saving foreign currency (through import substitution) or exports. As noted above, Saudi wheat exports are sold at prices that are a small fraction of the cost of production to the Saudi economy. As for import substitution, it was noted that in the modern sector "98 percent of the seed comes from the United States, insecticides and pesticides are all imported, so is equipment and spare parts. Farm managers are foreigners, usually from the United Kingdom, Australia, or the United States, and the laborers are Asian. The owner is a Saudi.,,2 The result is a huge out-flow of foreign currency. The remittances sent home by foreigners working in this and other sectors of the Saudi economy represent the payment for imported labor services. Total remittances in 1989 were reported at $8.3 billion, equivalent to over one-third of oil export revenues.3 The modern agricultural sector has contributed its share to the growth of imports of both good and services.

Another major problem aggravated by the drive for "food security" is water scarcity. Saudi Arabia lies in the extremely and climate zone, where annual rainfall is a meager two or three inches. Sources of water are extremely limited. There are no permanent rivers or fresh bodies of water. As a result, almost all of the cultivated area is dependent on irrigation from wells, pits, subterranean canals, or springs. Fossil water, which comprises 75 percent of the kingdom's water reserves (desalination plants in the urban areas account for 5 percent of the country's total water supplies), is entirely non-renewable and is being rapidly depleted as a result of the expansion of modern agriculture, and in particular the emphasis on irrigated wheat and other cereal crops. Estimates for 1985 were that non-renewable water resources supplied nearly 80 percent of the country's total water consumption. Between 1980 and 1985, water consumption more than tripled, with agriculture accounting for 84 percent of total water usage. A 1989 report of the U.S. Department of Agriculture concluded that if water consumption grows by 10 percent per annum (far less than the growth rate in the 1980s), the aquifers could be exhausted in ten to twenty years. Growing a ton of cereals (mainly wheat) using desalinated water would cost an impossibly high $3,500 per ton; the world price of wheat has been around $100 per ton. The absurdity is that farmers receive water supplies at virtually no cost.

During a visit to Saudi Arabia in 1983, the U.S. secretary of agriculture undiplomatically characterized Saudi agricultural policies as "crazy." American agronomists commented that the "growing of cereals at an exorbitant cost in the desert makes about as much sense as planting bananas under glass [houses] in Alaska." In response to the critics, King Fahd asserted that "[Saudi Arabia] shall be able to refute allegations that the Kingdom is not an agricultural country. Other Saudi officials also responded to the criticism, calling the country's agricultural development "a thrilling story of success." Over the past decade, the expansion of agricultural production has continued in high gear, with three quarters of the Saudi wheat crop being exported at about one-tenth of the real cost of production, multiplying the waste and economic distortions observed by the secretary of agriculture. The 1985-90 Development Plan called for expenditures of $3 billion to expand water supplies, including the construction of more desalination plants.

What is more surprising is that, despite the growing fiscal problems, the 1990-95 Development Plan calls for a further annual expansion of agricultural output averaging 7 percent or about double the planned growth rate of non-oil GDP. Barring unforeseen radical changes in subsidization policies, the result will be an even greater drain on the treasury and an even more distorted allocation of resources.

There is no single reason why the Saudis-faced with large budget deficits since 1983-have failed to take strong measures to stem the drain on the treasury and the distortions arising from their agricultural policies. Such plans would necessarily have to include charging farmers for water supplies, sharply reducing procurement prices, and cutting or reducing many other subsidies. Though agriculture is an extreme case, the failure to implement serious cutbacks in farm-related subsidies is consistent with overall Saudi policy namely, once subsidies are initiated, it is politically difficult or hazardous to attempt serious cutbacks. As noted earlier, Saudi public expenditures are inflexible on the downside. Moreover, it appears that the larger farms are owned by members of the royal family and other influential clans, adding considerable clout to the farm lobby.