The ascent of Saudi Arabia’s 31-year-old Crown Prince Mohammed bin Salman has raised hopes of radical reform. Last year, the prince vowed to roll back government and unleash market forces. But that’s easier said than done, given the size of the Saudi state.
The Saudi government has typically extracted about 80-90% of its revenues from oil, but falling oil prices have forced a search for other sources of revenue. One of them is the plan to tax foreign residents who constitute well over half the economy’s total workforce. About 70% of Saudi nationals work in the unproductive public sector, while 9 out of 10 foreign workers are in the productive private sector. Yet, jobs in the public sector pay about 70% more than those in the private sector. This is because public sector jobs exist mostly for the Kingdom to channel oil revenues to Saudis.
Diversification of economy
‘Vision 2030’ shows few signs of reforming this perverse model. As oil revenues have dried up, a $2 trillion public investment fund is the new hope to sustain welfare spending. Even by 2030, the government is expected to contribute about 40% of total national spending. The prince wants to diversify the economy from oil and promote sectors in which, he thinks, Saudi Arabia possesses a “comparative advantage”. But if the price of oil were to rise again, where would the Kingdom’s comparative advantage lie?
These are decisions best left to markets, under the right institutions. Saudi Arabia’s institutions, though, are abysmal. The World Bank ranks it 105th in the world (in 2017) for enforcing contracts as “creditors are unlikely to recover their money through a formal legal process”.
The larger agenda of the reform plan is the development of a private, non-oil economy that can create 4,50,000 jobs for Saudi nationals by 2020. If that doesn’t happen, the plan makes space for labour quotas compelling private companies to hire Saudi nationals over foreigners. This suggests that ‘Vision 2030’ envisions a protectionist, state-led economy. To bring about serious change though, the prince should recognise that dependence on oil is not necessarily a curse. Chile, Norway, Botswana and Canada are resource-rich economies that have prospered using their resources. They are also market economies that respect property rights, which has allowed them to quickly overcome economic shocks.
Oil will likely remain Saudi Arabia’s main asset, so the focus should be on making its use more efficient by ending state control. Removing market barriers and building reliable institutions will also help. The policy of setting job quotas in the private sector for Saudis must go. Booms and busts, common in resource-rich economies, need to be accepted as part of life. A free labour market, along with a free private sector, will help the economy become nimble and might even lead to a diverse Saudi economy.
