Sun, Jan 03, 2016 - Page 9 News List

Saudi Arabia: The kingdom beyond oil

The Saudi government will need to rework business and labor laws to save its economy and create 6 million jobs

By Gassan Al-Kibsi

Illustration: Kevin Sheu

Over the past few weeks, the Saudi Arabian government of has been engaged in an unprecedented strategic policy review that could have ramifications for every aspect of the nation’s social and economic life. The full details are expected to be announced this month, but it is already clear that the kingdom — the world’s nineteenth-largest economy — is in desperate need of far-reaching reform.

There are two reasons why change has become urgent. The first is the dramatic drop in international oil prices, from more than US$100 per barrel in the middle of 2014 to below US$40 today. With oil exports accounting for nearly 90 percent of government revenue, the pressure on Saudi finances has been intense; the fiscal balance has swung from a small surplus in 2013 to a deficit of more than 21 percent of GDP last year, projections by the IMF show.

The second reason is demographic. In the next 15 years, about 6 million young Saudis will reach working age, putting enormous pressure on the labor market and potentially doubling its size.

It is easy to be pessimistic about this confluence of circumstances and many international commentators are, but there are also good reasons for optimism, most notably the new Saudi leadership’s recognition of the challenge and the possibilities that addressing them could create.

McKinsey Global Institute research shows that Saudi Arabia has the potential to double its GDP and create 6 million additional jobs by 2030, enough to absorb the influx of young men — and, increasingly, young women — entering the labor market.

However, to accomplish this the kingdom is likely to have to dramatically reduce its unhealthy dependence on oil — a strategic goal that has been long discussed, but never implemented.

Saudi Arabia has many sectors with strong potential for expansion. The nation has substantial untapped deposits of metals and non-metallic minerals, including phosphate, gold, zinc, bauxite and high-quality silica. Its retail sector is already expanding quickly, but it lags behind in areas like e-merchandizing and supply-chain efficiencies.

The nation’s tourism sector could be developed and upgraded, not only for the millions of Muslim pilgrims who visit the holy sites of Mecca and Medina every year, but also for leisure tourists. Saudi Arabia has a long coastline on the Red Sea, as well as other unspoiled areas of natural beauty that could attract visitors. The manufacturing sector, too, could be built up; at the moment, the kingdom has only small-scale domestic manufacturing, despite being one of the largest markets in the region for cars, machinery and other capital goods.

Exploiting these opportunities will require trillions of US dollars in investment, radical improvements in productivity and the government’s firm, sustained commitment. Doubling GDP over the next 15 years is likely to necessitate about US$4 trillion in investment, two-and-a-half times the amount of money that flowed into the kingdom’s economy during the 2003 to 2013 oil boom.

Attaining this level of investment would require radical policy reforms. During the oil boom, the state increased public-sector wages and social-welfare transfers — and thus was a major contributor to households’ increasing prosperity. The public sector continues to dominate most aspects of the economy, especially employment; about 70 percent of Saudi nationals work for the state.

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