The first of a two-part series. Click here for Part II.

The ongoing contraction of Saudi Arabia's economy is squeezing citizens and fostering discontent. Lagging prices for energy are largely responsible for Saudi economic woes. However, some local observers complain that the kingdom's rulers has been slow to respond to economic challenges. A continuation of current trends in Saudi Arabia could hamper US-led efforts to contain terrorist threats arising from Islamic radicalism throughout the Middle East and Central Asia.

A variety of Saudis interviewed prior to the September 11 terrorist attacks were pessimistic about Saudi Arabia's economic and political prospects. Speaking on condition of anonymity, the observers said the country's economic problems were growing worse. These burdens include massive military expenditures, an enormous debt, and the insistent need for more schools, hospitals, and other infrastructure, the expansion of which in lagging behind the rapidly expanding Saudi population.

The Saudi government's ability to address economic issues has important implications for the ultimate success of the US-led anti-terrorism campaign. Riyadh has been a close ally of the United States over the years, as well as a forceful advocate of moderation in the Islamic world. A deterioration of domestic economic conditions could weaken the Saudi government's ability to act as an advocate of moderation. [For background information see the Eurasia Insight archives].

Chronically low oil prices are providing the Saudi government with insufficient income to meet its financial commitments. Saudi leaders have announced an intention to cut back production in order to stabilize oil prices. OPEC members and many non-OPEC oil producers, including Russia and Kazakhstan, have announced their intention to go along with production cuts. [For additional information see EurasiaNet's economics archive].

So far, Saudi leaders have responded to economic challenges by reducing or eliminating the subsidy for services that used to be provided at little or no cost. In addition, observers say, most employees in the massive state-run sector have not received pay increases for years. The effective wage freeze, combined with a steady rise in consumer prices, has caused a decline of living standards for most Saudi households.

Those with the stagnant salaries might be considered lucky. The Saudi government, which is the country's main employer, has cut back dramatically on new hires. This has had a ripple effect throughout the rest of the Saudi economy where there is also a scarcity of jobs—or, more precisely, the types of jobs that Saudis will accept.

Economic necessity, though, is forcing growing numbers of Saudis to accept less well-paying and less prestigious jobs than in the past. Despite this, the male unemployment rate is estimated to be as high as 30 percent. The country's population boom could soon place additional pressure on the unemployment rate. According to one estimate, the Saudi population is increasing at about 3 percent annually, although the exact figure is uncertain. What is clear is that many new Saudi high school and university graduates cannot find suitable employment.

Several observers noted that Saudi women have become increasingly dissatisfied. Educated young Saudi women want to work and the country's economic contraction is placing pressure on them to bring in income. Yet there are few jobs available to Saudi women due to the Kingdom's well-known restrictions on women, and gender segregation in the workplace.

Indeed, the only professions in which large numbers of Saudi women have found work are nursing and teaching. However, since most educated Saudi women reside in the Kingdom's major cities, jobs in these two fields have become increasingly difficult to come by in urban areas.

While the Saudi men I spoke to all favor lifting restrictions on women, including the prohibition against driving automobiles, they all insisted that they are very much in the minority. Most Saudi men, they said, do not want to allow Saudi women to freely enter the work force both out of religious conviction and, perhaps more tellingly, the fear that increased Saudi female employment would come at the cost of increased Saudi male unemployment.

A major consequences arising from widespread unemployment is a revival of regional or tribal identification, rather than identification with the broader community. The inability of the government to provide employment and other benefits, combined with a sense that Riyadh favors one group -- the Najdis -- over all others has led people to rely increasingly on their tribal or regional kin. While not posing any particular threat at present, some observers expressed concern that if this trend continues to grow unchecked it could ultimately pose a serious challenge to the kingdom's cohesiveness.

While many observers believe the vagaries of the international oil market are primarily responsible for the Kingdom's economic problems, some blame the Saudi government for not taking preventative measures to contain the economic problems. While a few said corruption was a problem, others said the government was not being efficient in its use of state funds, and also questioned the ruling family's economic priorities.

Government inefficiency has become increasingly problematic in recent years, observers assert. They add that virtually all decisions, no matter how trivial, must either be made or approved at the very highest levels. The senior princes and their staffs are often up all through the night deciding matters that would be dealt with by mid-level bureaucrats in other countries. This decision-making process frustrates attempts to address the root causes of Saudi Arabia's economic weakness.

A few observers claimed that the Saudi ruling family is actually reluctant to reform the existing system. Like the rest of Saudi society, the royal family has been hit hard by the combined effects of the budget crunch and the population boom. Many royals have become so indebted trying to maintain their lavish lifestyles that they now are struggling to pay their bills. One source claimed that as many as 90 percent of the country's estimated 7,000 princes fall into this category.

While people in such circumstances would be forced into bankruptcy in other countries, the source noted, the Saudi royal family protects its own from this indignity—as well as from the inconvenience of paying off creditors. As a consequence, many royals now are having trouble obtaining additional credit. The situation has gotten so bad that Saudi businesses try to avoid accepting checks written by impecunious members of the royal family due to the high probability that they will bounce.

The royal family is reported to be focusing much of its attention on finding "suitable" positions for its younger members. There is, however, a scarcity of the former and an abundance of the latter. Both the armed forces and the government are saturated with royal-family members. Now the royal family is reportedly pressuring profitable Saudi businesses run by non-royals to hire young princes. The problem with this, according to two Saudis with close connections to the business world, is that few of these young princes have much business acumen.

At the same time, non-royal Saudi executives feel they cannot reject a royal family member's employment request out of fear that their businesses would not be able to obtain government contracts in the future. Since princes must clearly be paid princely salaries, Saudi businesses which have hired them have consequently experienced declining profitability. Sources indicated that this is is a growing problem since there is a constant supply of young princes needing jobs, and because no Saudi business would dare try to get rid of a prince no matter how much of a liability he proves to be after being hired.