This two part series considers Saudi Arabia's ambitious plan to transform its economy. Part 1 looks at the reach of the Vision 2030 plan and labour force implications, Part 2 will examine which industry bets are most likely to pay off.
Though he is yet to reveal the details of the plan, Saudi Arabia’s deputy crown prince Mohammed bin Salman has excited world attention with his Vision 2030 announcement for the oil-exporting giant. It is important for Saudi, and important for the rest of us. The oil giant is at the beginning of a vast economic change that must, if it is successful, also profoundly change Saudi society and politics. Even failure will bring changes, perhaps bigger ones. As Saudi changes over the next decade or so, it will change regional and then global political calculations.
This was apparent in the recent sweeping cabinet reorganisation in the Kingdom, explained as a necessary preliminary to executing the new plan under younger officials more closely aligned with Prince Mohammed. The cabinet changes are merely a portent of bigger changes to come.
Vision 2030 is ostensibly for a Saudi Arabia no longer dependent on oil, which now accounts for four fifths of its government revenue, more than a third of Saudi’s economic output — and a large part of its influence in global and regional politics. Far more importantly, however, the plan is for a new private sector economy which provides good jobs for Saudi nationals.
To realise Vision 2030, Saudi would have to become a very different society, in quite a short time. Were the plan successfully implemented, Saudi would have one of the best educated and wealthiest workforce in the Arab world, an economy equivalent to those in Western Europe in its standard of living and industry mix, the freedom to pump or conserve its oil resources as it chose, and a secure state resting confidently on the willing consensus of its people.
It is very difficult to see any of those outcomes being attained even partially without big changes to Saudi’s cultural values, way of life and political organisation.
While Prince Mohammed has not revealed many details, a report published by the McKinsey Global Institute (with input from the McKinsey Riyadh office) last year titled 'Saudi Arabia Beyond Oil' offers some clues to what is likely to be in the detailed plan. As an economist moving around the Gulf rapidly becomes aware, McKinseyism is pervasive among the regions’ planning authorities.
By the numbers
The McKinsey plan's central and stunning call is to double GDP over the next 14 years through a $US4 trillion investment program. That eye-popping figure is about five times Saudi’s current GDP and also about five times its current net liquid reserves. Over the 14 years, investment alone would account for around one third of Saudi GDP by expenditure. Most of the investment is expected to come from private sources, but even so, McKinsey’s plan to double GDP calculates that Saudi’s liquid reserves are wiped out. Under the plan, net government debt in 14 years would be nearly as big as net liquid assets today.
As ambitious as it sounds, the McKinsey plan is not entirely daffy. The Kingdom already invests over a quarter of GDP, and has for some time. The new plan would increase investment by about a third over current levels. The targeted 4.5% rate of output growth sought in the plan is not far above the average rate over the last decade, excluding the downturn in the Global Financial Crisis. The centrepiece of what we know of the Saudi plan so far — the creation of the world’s biggest sovereign wealth fund — is entirely plausible. It can and will be achieved automatically simply by re-designating the Saudi oil producer, Aramco, to be the fund’s central asset. Depending on assumptions about the future oil price and future bond rates, it may be worth at least $US2.5 trillion; very much more than the combined total of the next two biggest sovereign wealth funds, those of Norway and Abu Dhabi.
Even so, it is still a big ask. As McKinsey points out, the investment required is about three times the investment in the Saudi economy in the ten years to 2013, which was three times investment in the previous ten years.
And even if the pace is not quite as quick as the McKinsey plan specifies, implementation on any large scale presents difficult issues for Riyadh to manage.
A new private sector economy
The goal of the plan is not just to double GDP. It is to double GDP by creating industries that employ Saudi nationals in the private sector. Today there are around eight million foreign workers in Saudi, mostly in the private sector. That is close to the size of the workforce of Saudi nationals, mostly employed in the public sector. To succeed, the plan must create a new private sector economy capable of employing most Saudis who want to work. Only a very small share of the jobs can be created by ‘Saudiisation’ of jobs now held by expatriates, because all but an insignificant fraction of those expatriates are low wage guest workers. Saudi’s don’t want and won’t work in those jobs.
The employment of millions of Saudi nationals requires a new economic structure. But first of all the physical infrastructure of that new economy has to be created. Paradoxically, the regional experience tells us this will require a huge increase in the expatriate labour force. Saudi needs to first construct the offices, warehouses, shopping malls, schools, hospitals and factories required to double output, and the telecommunications, railways, roads, water and energy utilities needed to service the new facilities. That is where a big chunk of the $US4 trillion in investment will be spent. Inevitably, much of it will find its way back to India, Pakistan and Bangladesh as employee remittances, and to the big contractors in the US, Europe, Japan and perhaps China.
Almost all of the required army of construction employees will be low-wage and largely unskilled migrant workers, as is true throughout the Gulf. This is sensible and appropriate because a construction boom is by definition temporary. Even so, the most evident and immediate result of a program to create jobs for Saudis will be to create them for non-Saudis. It is also highly likely that recorded labour productivity across the Kingdom will fall as find the labour intensive construction sector booms compared to other sectors. Saudi has got used to a large migrant labour force. In the next decade or so it will have to get used to a vastly bigger one.
Under the McKinsey proposal most of the investment would be private, and to a large extent foreign. Overall, foreign ownership would have to expand quite dramatically, bringing with many more European, Chinese, Japanese and American staff. Their presence, and that of their families, will strain the conservative rules of Saudi society.
The overall goal is to employ Saudis in the new economy. To be employable in a largely private sector economy, however, Saudis will have to be educated in ways useful to a modern economy, and they will have to be convinced that the public sector jobs their fathers' now have will not be theirs. The structure of income support will have to be change to encourage job-seeking. Women are increasingly joining the Saudi economy, and a many more will be needed in the modern, complex economy sought by the plan. At a minimum, they will need to drive cars. All these requirements will chafe against the existing social rules, the alliance between the Saud family and the clerics, and the existing community support for the ruling family.
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