Middle East

Saudi Arabia's Reform Plans Are Too Timid

The kingdom hopes to break its oil dependence without investing enough in human capital.

Still can't drive.

Photographer: Stringer/AFP/Getty Images

Saudi Arabia's new plan to lessen the kingdom's dependence on oil, is making headlines because the country's name is synonymous with crude exports. If even the Saudis, with the biggest and most easily extractable oil reserves in the world, are getting serious about diversification, something is changing. Besides, the effort has a handsome public face, 30-year-old Prince Mohammad bin Salman, a new-generation, modernizing royal.

A closer look at the National Transformation Program, however, suggests that the Saudi diversification attempt probably won't achieve much: It's not bold enough in the area that matters most -- developing human capital.

QuickTake Saudi Arabia's Strains

Nobody likes oil export dependence. Countries with diversified exports grow faster, and no government has ever proudly declared, "We are going to export crude oil while we can, and that's it." And yet despite all the talk of diversification, few countries have ever achieved it. According to an analysis by the World Bank's Farrukh Iqbal, of all the countries "awash in oil" in the 1970s -- that is, dependent on crude for at least 50 percent of exports -- only Indonesia, and, to a much lesser extent, the United Arab Emirates have attained notable diversification.

Malaysia and Mexico have also been named  diversification successes. One thing these two countries have with Indonesia, though, is that their non-oil development strategies have centered on building up labor-intensive industries, bolstered by an abundance of cheap workers and, in Mexico's case, free trade with the U.S.

This model may yet work for Nigeria, which has its own "zero oil" plan, much less publicized than the Saudi one but rather ambitious: The country hopes to increase its non-oil exports to $30 billion by 2025 from $5 billion a year today. The program stresses labor-intensive agriculture. Yet for the wealthy Gulf states -- and for Russia, Saudi Arabia's rival for the title of the world's biggest oil producer -- this won't work: Their populations aren't interested in lots of manufacturing or agricultural jobs. They are either too pampered, too tradition-bound or have too many years of education to enjoy that kind of work.

These countries need to develop more sophisticated, higher value-added exports, but somehow they can never quite figure out what to do.

Saudi Arabia is a good example. Of it's adult population, 22 percent are college-educated -- compared to 19 percent in Mexico and 8 percent in Indonesia. Most locals work in the government sector, and many of these jobs are useless sinecures. About 10 million foreign workers do the actual work. According to the National Transformation Program, it's four times more expensive to hire a Saudi national than a foreigner. Besides, women are artificially kept out of the workforce, making up just 23 percent of it: They're not allowed to drive, and tradition frowns upon important roles for them. 

The Saudi government has acknowledged all these problems in its Vision 2030, a broad outline of planned reforms. Yet when it came to setting specific targets in the new Saudi program, the reformers have mostly proved timid. 

The government plans to cut the public payroll by 20 percent, pushing Saudis toward private-sector employment. Wherever the redundant employees go -- presumably, mainly to the tourism sector that the kingdom plans to expand -- few are likely to end up in the tech industry, which would have been a logical diversification play for a relatively wealthy country like Saudi Arabia. The 2020 target for "rehabilitating" Saudi cadres for information and communications technology (ICT) roles is just an extra 20,000 people. Only about 1.7 percent of the total workforce work in ICT in the kingdom, far smaller than the 3.6 percent average for Europe (where employment in the sector has been growing at a rate of about 4 percent a year). Given that the Saudi plan is based on a lower growth rate, it seems sure that the country fall even further behind.

There won't be much improvement for Saudi women either. The plan is to raise their share in the public sector workforce to 42 percent from the current 39.8 percent, and in top positions to 5 percent from 1.27 percent. But even the plans to increase women's share of the general labor force to 28 percent doesn't amount to a big step toward gender equality. There is still no plan to allow women to drive; in other words, unlocking women's potential for making the economy smarter and more diversified is not really on the cards in the next few years.

The Saudi government understands the importance of improving education quality for "smart" diversification, and has ordered a drastic improvement in students' math and science test scores. But this process can't be fast, and even the end results the education ministry is supposed to achieve would put Saudi Arabia well below the average for developed countries. All Gulf states have a long way to go before the quality of education is up to developed world standards, and that undermines their ability to reduce oil dependence.

The Saudi "transformation" will nevertheless be exciting for investors: It relies on an increase in the public debt level to 30 percent of economic output from the current 7.7 percent, promises large-scale privatization (of the port authority, for example) and some potentially exciting government-funded projects, like a switch to e-government or the women's transportation plan. The government would like to see the budget's non-oil revenues grow more than threefold by 2020, and that would require lots of new investment. Yet though money will be borrowed and spent, the unambitious human capital plans are likely to hold up the shift away from oil.

Throughout the Middle East and in Russia, where former President Dmitri Medvedev's modernization program has died a quiet death as defense spending took precedence over everything else, investing in education and generally in the quality of the workforce is ultimately the only way to kick the oil habit. Yet for the authoritarian regimes that run these countries, improved human capital presents a danger: The more people know and the more they can do, the more power they want.

Peterson Institute for International Economics's Jacob Funk Kirkegaard, who analyzed the Saudi Vision 2030 last month, wrote that the plan would not succeed "without giving the Saudi people a direct voice in electing their own government and breaking the chokehold of the Wahhabist clerical establishment." Such demands would be the inevitable result of a higher-quality, more inclusive Saudi workforce. As long as the reformers want to tread carefully, big "transformation" budgets -- about $71 billion for related programs starting this year -- may not bear the fruit the government expects.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Leonid Bershidsky at lbershidsky@bloomberg.net

    To contact the editor responsible for this story:
    Therese Raphael at traphael4@bloomberg.net

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