Saudi Arabia’s Great Transformation – Project Syndicate commentary

July 01, 2023

An unprecedented experiment in economic and social transformation is playing out in Saudi Arabia, and the outcome could have profound implications for the entire Arab world. The main goal of the kingdom’s Vision 2030 plan is to shift the economy away from fossil fuels. It is a timely pivot, given that greenhouse-gas emissions must be reduced by 45 per cent by 2030 and reach net zero by 2050 to achieve the Paris climate agreement’s goal of limiting global warming to 1.5° Celsius.

At the same time, the challenge is difficult to overstate. Most of Saudi Arabia’s wealth is derived from its vast petroleum reserves (the country is the world’s top crude exporter), and the risk of these assets becoming stranded is existential.

Saudi Arabia is not the first petrostate in the Middle East to attempt a move away from hydrocarbons. For several decades, other Arab economies have pursued similar diversification efforts with little success. A notable exception is Dubai, which reinvented itself as a logistics center, tourist destination, and offshore finance hub to offset declining oil reserves. But the city-state model that has succeeded elsewhere may not be scalable, which is why policymakers in the region and beyond will closely watch the ambitious development program in Saudi Arabia, a country with nearly 37 million inhabitants.

Matching Dubai’s success is a formidable challenge, but Saudi Arabia’s leader, Crown Prince Mohammed bin Salman (widely known as MBS), wants nothing less and is deploying immense resources to accelerate the kingdom’s socioeconomic transformation. Efforts are underway to make the country a powerhouse in green energy (including hydrogen), mining, logistics and infrastructure, sports, music, tourism, digital services, finance, and entrepreneurship. The government has also sought to increase the female labor-force participation rate by allowing women to drive, limiting the morality police’s powers, and imposing fees on private firms employing foreign labour.

Saudi Arabia’s ambitious economic experiment must be taken seriously. Saudi Aramco, the state-controlled oil giant, reported a record profit of $161.1 billion for 2022, and revenues have been invested domestically and globally through the kingdom’s sovereign wealth fund, known as the Public Investment Fund. At home, petrodollars are funding a long list of mega-projects to improve transport, revolutionise urban development, diversify the energy sector, and boost tourism. Neom, a futuristic carbon-free city being built on the Red Sea, embodies the audacity of these efforts.

Saudi Arabia has also raised its value-added tax rate from 5 per cent to 15 per cent, providing a fresh source of domestic income. That is significant in a country where citizens have long received handouts and subsidies in exchange for political acquiescence. The results are already noticeable. While petrodollars have historically accounted for around 90 per cent of the government’s budget revenue, non-oil income accounted for 32 per cent of budget revenue in 2022.

Moreover, there is evident enthusiasm about Vision 2030, especially among young people. The ASDA’A BCW Arab Youth Survey indicates that young Saudis are confident the country is heading in the right direction. In a region where concern about corruption and distrust in government are widespread, uniting behind a common policy goal is unusual. In many Arab states, governments have not galvanised their populations around a shared aim since the early post-independence era over 60 years ago. Indeed, popular support for Vision 2030 recalls the heyday of Arab nationalism and state-led development policies, spearheaded by leaders like Egypt’s Gamal Abdel Nasser.

But there is a fundamental difference between the Saudi experiment and the post-independence era: Vision 2030 is geared toward liberalisation and attracting foreign investment, rather than widespread nationalisation and redistribution. Here, the initial public offering of Saudi Aramco in 2019 is emblematic.

Similarly, labour-market reforms are moving forward swiftly, the aim being to encourage Saudis to participate more actively in the private sector. While public employment – an integral part of the social contract – remains high, it has declined slightly since 2019, and employment contracts have become more flexible. Another reform seeks to attract more skilled foreign workers by increasing their job mobility. Other developments aimed at opening up the economy, including the creation of special economic zones, will help the kingdom become a major logistics hub.

The Saudi experiment is not without risks. There are some things money can’t buy, like institutional capacity and the ability to plan strategically. Moreover, Saudi Arabia’s extensive use of consulting firms, despite its large pool of local talent, may prove problematic when the money runs out. Likewise, a mega-project could become an albatross, or efficiency-enhancing reforms may not have the intended effects.

Saudi Arabia’s location in a geopolitical hotspot could also threaten its transformation. Its recent agreement to restore diplomatic ties with Iran, efforts to secure a ceasefire in Sudan, and welcoming of Syria back into the Arab League represent a U-turn from the more aggressive foreign policy in the mid-2010s, demonstrating MBS’s awareness that domestic success requires stability in the Middle East and Northeast Africa.

It remains to be seen whether the kingdom, with its vast resources, renewed confidence, and commitment to an accelerated timeline, can translate its vision into reality. The region would surely be better off if it succeeds. — Project Syndicate

Rabah Arezki, a director of research at the French National Center for Scientific Research (CNRS), is a senior fellow at Harvard Kennedy School. Tarik M. Yousef is Director and a senior fellow of the Middle East Council on Global Affairs.

Read the commentary on Project Syndicate here