This is the second in a two-part series examining Saudi Arabia's ambitious plan to transform its economy. Part 1 looked at the reach of the Vision 2030 plan and labour force implications; part 2 examines which industry bets are most likely to pay off.
Vision 2030's central and stunning call is to double Saudi GDP over the next 14 years. But what kind of economy will Saudi Arabia be? McKinsey's 2015 report, 'Moving Saudi Arabia's Economy Beyond Oil', which offers some clues as to what is likely to be in Saudi Arabia's detailed plan, specifies eight industries that it claims could create nearly two-thirds of the required output growth: mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, health care, finance,?and construction.
If the goal is to create jobs for Saudi nationals, it is easier say what kind of economy it won't be. It won't be based on labour-intensive manufacturing, because low-wage economies in Asia already do that far more competitively than Saudi can even think of matching with a workforce of Saudi nationals. Saudi could not do it even with high tariff protection (which one would not expect to be part of a McKinsey plan) because its economy is too small. It is about half the size of the Australian economy, which discovered a while ago there is no future in labour-intensive manufacturing (ominously, McKinsey mentions vehicle assembly as a desirable industry for Saudi). Nor will Saudi's new economy be based on capital-intensive manufacturing, because the smarter the manufacturing process, the fewer the jobs.
Certainly, there are niches in between. In this respect Bahrain, Saudi's tiny neighbour and ally, offers valuable lessons. Bahrain has long successfully staffed its aluminium and oil refining industries with Bahraini nationals. That works with high-productivity, high-wage industries. It doesn't work with low-wage, labour-intensive industries like food manufacturing, and of course it doesn't work with manufacturing processes that can be performed by robots.
Lessons from Bahrain, but not from Dubai or Abu Dhabi
More broadly, Bahrain offers lessons worth examining. It, too, has a 2030 Vision, adopted more than a decade ago. It too has its designated development sectors (including logistics, education, manufacturing, tourism and finance), its designated authorities to oversee the plan, its key performance indicators for ministries and authorities, its own Crown Prince to drive the program, its eager consultants and its colourful PowerPoint presentations. [fold]
Though often championed in discussion of the Saudi development plan, in my opinion the Dubai and Abu Dhabi models are not relevant. Most of their success is as transport hubs, which they have leveraged into short term tourism and long term real estate developments that are in large part second homes for wealthy Arabs — often Saudis. Their manufacturing activities, high tech theme parks, university campuses and so forth are almost always highly subsidised and have had very mixed results. The UAE states have very small populations of nationals, and very big low-cost expatriate workforces. This is not the direction Saudi should go. Despite its small size, Bahrain's successes and failures offer a better model for what is likely to be the Saudi experience.
Manufacturing, construction and agriculture
I doubt manufacturing will create a large number of new jobs for Saudis. Nor are non-oil mining industries or agriculture likely to be the basis of the new Saudi private economy. Mining is usually a high tech industry, pays good wages, and encourages skills, so in those respects is attractive. McKinsey claims that non-oil mining and processing can triple its current 3% contribution to GDP and employ an additional 500,000 Saudis. But, like manufacturing, the better mining is, the fewer the people it employs. Even in Australia, a big mining country, fewer than 4% of employees are in the business. Mining accounts for 8% of Australian GDP (which is roughly twice Saudi GDP) but in total employs less than half the number of workers McKinsey says could be added to the Saudi nationals workforce engaged in non-oil mining and processing. Even throwing in some additional jobs for processing, half a million additional jobs seems to me highly unlikely.
So too for agriculture. If agriculture is going to be globally competitive, it won't employ many people. Australia is a big producer of wheat, meat and other food and fibres for the world market, but less than 1% of Australians employees work in agriculture.
Construction? It is already a very big business and with a $US4 trillion investment program it will become much bigger. As McKinsey points out, nine tenths of the jobs are filled by expatriates. The consultancy firm thinks Saudi nationals could be persuaded to take on construction work. But this is hard, hot, sometimes dangerous work, and not well paid. It is unlikely Saudi nationals will be a significant part of the construction workforce.
Petrochemicals, defence and tourism
Petrochemicals is one business at which Saudi is already successful, which also means room for expansion is limited. McKinsey says it might employ 'thousands' more Saudis, which sounds about right. It won't make a dent in overall number of jobs needed.
Defence is to be one selected industry, according to accounts of Prince Mohammed's thinking. With Saudi's huge defence spend there are probably possibilities there. They are likely to be in servicing, repair and maintenance, or perhaps in the manufacture of some parts as an offset arrangement with major American defence suppliers.
Islamic tourism is another. Saudi of course has vast Islamic tourism already through the Hadj; probably more than it really wants. Non-Islamic tourism could grow quickly from a small base, but its scale is limited by the need for female tourists to cover up, the ban on alcohol, and the want of sufficient variety in its attractions to warrant repeat visits. Bahrain is much more liberal but even so, the overwhelming majority of its tourists are actually from Saudi. McKinsey specifies that a bigger tourism sector could employ an additional 1.3 million Saudi nationals. Perhaps it could, but if the experience of Bahrain in trying to employ Bahraini nationals in low wage tourism jobs is anything to go by, it won't.
Service industries should be the focus
So that leaves other services, which is where Prince Mohammed and his advisers ought to start. Service industries are the predominant form of output and employment in all advanced economies. They are usually the fastest growing sector in developing economies and China is now the most conspicuous example. They exist across a whole spectrum of skill requirements, from easy entry-level jobs in retail and fast food, fitness and training, through to highly skilled and rewarding jobs in IT services, health, education, finance, law, accounting, and so forth. Bahrain has successfully created a regional finance industry that now rivals oil processing in its contribution to GDP.
These are jobs and industries that depend more than most on human capital; that is, education and work skills. This will be Saudi's big problem and Prince Mohammed's most difficult political task. Again, Bahrain offers some good examples with its more liberal, modern and accessible education system, though the quality remains patchy. In Bahrain it was increasingly apparent that education and training was the key to ultimate success — and that takes time.
Finally and most importantly, it was evident in Bahrain that the success of a plan requires big changes in attitudes towards work and in social rules, in the relative balance between the foreign and local elites, and between commercial and political elites. But success also depends on political stability and the ability to execute a plan over a long period.
All that said, Saudi is a very wealthy economy with many advantages compared to Bahrain.
If it is united and resolved, the ruling family can mobilise the resources necessary to transform the economy. Unlike Bahrain, it can run large fiscal deficits for a very long time. There is a reasonable chance Saudi will be a very much bigger economy in a decade, with a much higher proportion of Saudis employed in reasonably good private sector jobs, with higher workforce participation by women and higher average levels of education and training. Unlike the UAE, Saudi has a substantial population of nationals.
Unlike Bahrain — unlike most countries, for that matter — the Saudi ruling family has at its disposal sufficient revenues for sufficiently long to pay for the additional education and training which will be needed, and to support a share of the investment in physical infrastructure that will be required. It has sufficient revenue to continue to provide for the retirement of older Saudis while accustoming younger Saudis to a more demanding working life. It has sufficient revenues to continue to support good health services and urban services, and it can probably do so for some years without needing to impose additional taxes.
The Vision 2030 plan's targets are probably way too ambitious, but even a partial achievement would take Saudi a long way down the path it must sooner or later take if it is remain a cohesive society with claims to regional leadership, able to fulfill the ambitions and potential of its people.
Photo: Jordan Pix/ Getty Images.