A real economic transformation is underway in Saudi Arabia
'Vision 2030' is reducing country's dependence on oil exports
Tarek Fadlallah is managing director and CEO of Nomura Asset Management's Middle East branch. The views expressed herein are his own and not those of Nomura.
Economic transformation is defined by swift and radical change that can be structured and deliberate, such as that of the U.K. in the early 1980s, or unplanned and chaotic, as in Eastern Europe after the fall of the Berlin Wall.
The world's next great economic transformation is now taking place in Saudi Arabia.
Many past economic transformations included a significant amount of societal upheaval, and brought unintended consequences and collateral damage that were often borne by those who had prospered under the previous status quo.
In the U.K., labor unions were weakened and industries in which the country could no longer compete effectively were restructured.
The public sector shed billions of pounds worth of inefficient assets and thousands of impacted companies were sold or permitted to fail. Financial liberalization allowed the U.K. economy to pivot toward service industries.
The cost to society was evident as the unemployment rate more than doubled to reach nearly 12% and a deep recession ensued, leaving long-lasting scars in Britain's manufacturing heartland and creating serious schisms within society. The consequences still linger and reverberate over 40 years later.
Saudi Arabia's Vision 2030 transformation plan, crafted with help from legions of international consultants and launched in April 2016, is now at its midpoint. This then marks an appropriate time to take stock of what has been achieved and what has yet to be done.
In many ways, Saudi Arabia's challenges are considerably bigger than those confronted by Britain's Margaret Thatcher, and they are complicated by a desire to build a sustainable transition within the constraints of a world racing toward net zero carbon targets.
Saudi Arabia is not only pivoting to reduce its heavy reliance on petroleum exports but also to restructure a domestic economy built on layers of generous subsidies, monopolies and patronage. This is a gargantuan task that at the outset seemed improbable and strewed with risks.
Under the critical gaze of the international community, this shift is taking place at a time when climate change is putting fossil fuels and the energy transition in the global spotlight. This tension is likely to be evident next month when the neighboring United Arab Emirates hosts the next annual U.N. Climate Change Conference.
Although the Vision 2030 plan still has another seven years to run, it has already had a range of interesting impacts.
First, the withdrawal of subsidies and introduction of a tax on consumption initially squeezed household and corporate budgets, but the effect has been offset by fiscal expansion and general economic buoyancy. Unemployment has fallen, wages are rising, the country's non-oil sector is growing and the fiscal outlook is healthy, notwithstanding the COVID pandemic and one of the sharpest monetary tightening cycles in history.
Second, while sweeping change can create uncertainty for businesses and households, there is broad support among the Saudi population for reform. The acceptance of new ideas, so many and so quickly, in what is still a conservative society has astonished observers.
Third, the Vision mission has become entrenched into daily life and become a cause that the younger generation, particularly the educated and urban, appears keen to join. Many consequential roles in government and financial institutions have been filled by those who will inherit the Vision economy.
Fourth, counterintuitively perhaps, the public sector has shown a greater dynamism to lead than the historically risk-averse private sector. Saudi bureaucracy, criticized in the past for being slow and rigid, has been turbocharged.
Fifth, moves to build futuristic cities in the desert, an extraordinary 400-meter high cube in the capital Riyadh and investments in world-class sporting assets show a willingness to be unconventional and creative.
Sixth, and probably most importantly, is that all government institutions and agencies have positioned Vision 2030 at the core of their respective missions, including the $700 billion Public Investment Fund which is financially underwriting many of the key programs.
None of this is to guarantee the outcome, of course, and the needle on many key economic metrics needs to move a lot more than it has so far. Foreign direct investment is lagging, and reliance on petroleum exports remains too high. Nonetheless, while history will ultimately judge the success of this project, it is already providing economists and academics with reasons to take note.
After all, there are few historical examples of economies powered by commodity exports effectively overcoming that dependence, which is why such reliance is sometimes referred to as a resource curse or paradox of plenty.
At the Future Investment Initiative forum in Riyadh in October 2018, Saudi Crown Prince Mohammed bin Salman was met with warm applause from those inside the auditorium and widespread skepticism from those outside it when he declared that the Middle East could be the "new Europe." Saudi Arabia, along with the UAE and Qatar, is aiming to turn this sentiment into reality.
Significant challenges remain but this can be the Gulf's golden age. Saudi Arabia's transformation, even if not completely fulfilled, will be immensely positive for the region and beyond.