The Saudi monarchy and economic familism in an era of business environment reforms

Abstract

In recent years, Saudi Arabia has strengthened its regulatory and financial institutions and adopted many reforms concerning its business environment. Yet, Saudi Arabia seems an unlikely country to succeed at implementing business environment reforms given the presence of an authoritarian state and rent-seeking behavior from elites that is the outcome of oil wealth. What explains the ability of Saudi Arabia to initiate reforms that many states have struggled to implement or uniformly reject? This paper argues that the country's monarchical system helps the government solve the credible commitment problem with private sector elites, thereby facilitating business environment reforms. The monarchical system does this by legitimizing and reinforcing the institution of economic familism. The salience of this institution provides a reliable guarantee to private sector elites that their rents and business interests will be protected during the reform process. The case of Saudi Arabia stands as an important example of how absolute monarchies can pursue certain economic reforms, and also how an informal institution can solve the credible commitment problem in an authoritarian context where formal institutions are either absent or weak.