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contributor perspectives

Jan 29, 2017 | 14:00 GMT

Saudi Arabia's Myopic Vision for Reform

Board of Contributors
Hilal Khashan
Board of Contributors
Saudi Deputy Crown Prince Mohammed bin Salman unveils his Vision 2030 plan for reform on April 25, 2016, in Riyadh.
(FAYEZ NURELDINE/AFP/Getty Images)
Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.

Like many of its neighbors in the Gulf region, Saudi Arabia is scrambling to adjust to a world of low oil prices. The Saudi economy, which relies heavily on oil production, has sputtered and stalled over the past few years, rapidly depleting Riyadh's once-enormous cash reserves. In a desperate attempt to rescue the kingdom's foundering finances, Saudi rulers have hastily pulled together a plan to diversify the economy and end its dependence on oil once and for all. But instead of saving Saudi Arabia, the solution Deputy Crown Prince Mohammed bin Salman has proposed will almost certainly lead to its ruin.

A Flawed Strategy

Bin Salman announced his Vision 2030 plan in April of last year. In it, he called for the downsizing of the public sector's role in the economy and the empowerment of the private sector. The latter, he hopes, will eventually become the kingdom's largest employer and primary means of economic growth. (As of now, nearly 70 percent of the country's labor pool works in the public sector.) By hiking up the private sector's contribution to the gross domestic product from 40 percent to 60 percent, bin Salman says, the Saudi economy will rise from its "current position as the 19th-largest economy in the world into the top 15." He also estimates that unemployment would drop from 11 percent to 7.6 percent.

Many of the prince's recommendations are based on a McKinsey report that advocates shocking the Saudi economy back to life. Between 2003 and 2013, the country's GDP grew at an anemic rate of 0.8 percent, but McKinsey analysts argued that the kingdom could double its GDP over the next 14 years with about $2 trillion in investment.

Yet there's a fundamental flaw in how the prince intends to go about getting that kind of money.

Yet there's a fundamental flaw in how the prince intends to go about getting that kind of money. Vision 2030 is predicated on Riyadh's ability to build a massive sovereign wealth fund by selling off 5 percent of Saudi Arabian Oil Co. (Saudi Aramco). But the revenues generated from Saudi Aramco's unprecedented initial public offering will only stem the flow of money draining from Riyadh's coffers this year. Any funds left over would be nowhere near enough to sink the kind of investment McKinsey believes would be needed to turn the entire economy around. Instead, the kingdom would have to sell off half of Saudi Aramco's assets to even approach that value.

Funding isn't the only problem with the prince's plan. Vision 2030 is ultimately geared toward generating revenue beyond the oil sector, in part by ramping up private industrial output. That, however, will work only if Riyadh invests in the appropriate industries, such as manufacturing, petrochemicals, mining and health care. There are limits to how much these sectors can be developed, though. Saudi Arabia, for example, cannot realistically hope to compete in a labor-intensive industry like manufacturing when its citizens have grown accustomed to higher-paying jobs in the public sector. The country's petrochemicals industry, moreover, is already fairly advanced and has little room to absorb more workers. The same is true for Saudi Arabia's mining sector, which does not require a large workforce. Meanwhile, even if Riyadh pumps a considerable amount of money into its health care sector, the kingdom is unlikely to grow into the regional medical hub it aspires to be since more advanced facilities already exist elsewhere in the region.

So, the most promising Saudi sector remains religious tourism, which has skyrocketed in recent years and is second in size only to oil. Riyadh raked in $22.6 billion from religious pilgrims in 2015, a figure that is expected to rise by another $10 billion by 2021. Still, the Saudi government's reluctance to issue visas to travelers may continue to put a drag on the industry.

More Delusion Than Vision

The ruling family has already wasted valuable time in its search for a feasible plan for economic development. Between 1970 and 2014, the kingdom spent trillions of dollars on nine different five-year reform packages, yet today oil revenue still accounts for 90 percent of its income. What the prince and his predecessors have consistently missed is that the creation of a Western-style economy requires change that reaches beyond the economy itself.

Part of that change is instilling a better work ethic and encouraging individual achievement among the population. As it stands, Vision 2030 offers few concrete proposals for preparing Saudi citizens to set aside their view of the kingdom as a nanny state. For decades, Saudi nationals have taken for granted the availability of easy and lucrative jobs in the public sector while expatriates have filled about 80 percent of the jobs in the private sector. Efforts to privatize the economy may indeed create more opportunities for work, but not the kind the kingdom's citizens are eager to take. If the royal family is serious about overhauling the economy, it will need to take the time and spend the money to educate its people. Only then can it address deficiencies in professional training and cultivate a culture that rewards determination and provides opportunities for all.

Meanwhile, Vision 2030's claim that authorities will work to combat all forms of corruption is probably unrealistic. Though an admirable goal, it cannot be achieved in a society where family, tribal and regional ties outweigh the nebulous concept of the Saudi state. Societal norms pressure Saudi officials to favor family and friends, even if they have to violate the rules of bureaucratic conduct to do so. Those who follow procedures, on the other hand, risk being ostracized by their local communities.

In Riyadh's frantic attempt to avoid a financial collapse, it has seized on a short-term fix instead of a long-term solution. Scraping together funds, rather than stimulating much-needed economic development, will not do much to protect Saudi Arabia's future. If the royal family does not do more to attract foreign investment and funnel it into genuine diversification projects, Vision 2030 will succeed only in leading the kingdom into bankruptcy — if not its outright dissolution as a sovereign state.

This column is drawn from a longer analysis published in Middle East Quarterly.

Editor's Notes

This column is drawn from a longer analysis published in Middle East Quarterly.

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