Saudi Arabia’s Vision 2030: the way forward

Vision 2030 intends to transform the Saudi economy – the largest Arab and second largest middle eastern economy after Turkey – and to reduce its dependence on oil. Since its launch in Spring 2016, it managed to attract a great deal of attention. It aimed to tackle many of the problems that impede the economy such as the low participation of women to the labor market, the dominance of the public sector and the overreliance of the private sector on government subsidies and contracts. It also planned to develop affordable housing in a country with a young and rapidly growing population.

Most of the attention, however, has been focused on Saudi Aramco’s IPO and other high profile initiatives. This included the launch of a futuristic mega-city called NEOM on the shore of the Red Sea, the commitment of the country’s Public Investment Fund to invest USD 45 billion in Softbank’s Future Vision Fund – the largest venture capital fund ever set – and the development of a tourism and leisure industry with resorts on the Red Sea, and hundreds of movie theatres across the kingdom. As part of Vision 2030 the government also announced a much awaited lifting of the driving ban on women.

There is a rationale in acquiring shares in foreign tech companies. But the spillover effect from those investments on the Saudi economy relies on the existence of a strong homegrown manufacturing and technological base. Therefore, Vision 2030 should aim to catalyze the development of these domestic capabilities. This entails the development of industrial clusters to put the Saudi economy on a high growth high productivity path.

New industrial sectors can be developed based on Saudi Arabia’s existing production base in petrochemicals and metal industries, and on the availability of affordable raw materials and energy. These include an automotive and aerospace components industry which could be developed around plastic molding and metal transformation. The petrochemical industry can also be used to develop pharmaceuticals, FMCG industries, and advanced construction materials such as glass, ceramics and polycarbonate structures. These activities hold a great potential for creating jobs for Saudi graduates in science and technology.

Saudi Arabia can also make forays into industries that are more distant from its current capabilities, such as electronics. This direction would be akin to what Harvard professor Ricardo Haussmann calls a ‘strategic bet’. It is more challenging but the reward might be worth taking the risk. In order to achieve this, the kingdom will need to build a strong services base in areas ranging from transportation and supply chain management to R&D and industrial design, marketing and advertising, and intellectual property rights management. The digital economy could also serve as a catalyst provided there is a shift from B-to-C to B-to-B applications supporting the automation of industrial processes.

The success of this endeavor involves well-conceived labor policies. So far, the prevailing strategy has been focused on substituting expatriates by locals. But it would be difficult to dismiss altogether the contribution of expatriates to the Saudi economy. Saudi nationals have high reservation wages which makes them reluctant to accept lower paid jobs. It also makes it difficult for private companies to comply with saudization policies. As a result, this is a lose-lose game. The alternative is to create new jobs for Saudis in high productivity activities justifying the wage premium.

Last but not least, the Kingdom should accelerate its economic integration with its neighbors by reviving the GCC single currency project. A single currency with a flexible exchange rate could stimulate the manufacturing sector and help absorb oil price chocks. Deeper integration will avoid duplicating projects and wasting resources in areas where scale economies are critical such as the automotive, pharmaceuticals and electronics industries. Increased cooperation in the industrial and financial sectors will provide the ground for a deeper integration. If History is any guide, it shows that economic integration can alleviate geopolitical tensions and reduce their potential of escalation.

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