Mohammed bin Salman Isn't Wonky Enough - Foreign Policy - 1 views
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Like Western investors, the kingdom’s elites are uncertain about what the new order means for the country’s economy. The new Saudi leadership has indeed created new opportunities, but many of the deep structural barriers to diversification remain unchanged. The bulk of the public sector remains bloated by patronage employment, the private sector is still dominated by cheap foreign labor, and private economic activity remains deeply dependent on state spending. Addressing these challenges could take a generation — and it will require patience, creativity, and a clearer sense of priorities.
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While a band of Al Saud brothers used to rule collectively with the king as a figurehead, decision-making has now become centralized under one man
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ruthlessness and willingness to take risks radically at odds with the cautious and consensual political culture of the Al Saud clan
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Saudi Arabia has tackled fiscal reforms more vigorously than most local and international observers expected, introducing unprecedented tax and energy price measures, including the introduction of a 5 percent value added tax, new levies on foreign workers, and increases in electricity and transport fuel prices. The government is now experimenting with new non-oil sectors with an increased sense of urgency, including information technology and defense manufacturing.
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While space for political opposition arguably has narrowed, women will soon be allowed to drive and the religious police force that once harassed them has been almost entirely neutered. By relaxing religious controls over the public sphere, the crown prince is seeking to attract more foreign investment and facilitate diversification into tourism and entertainment
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New policies and programs are announced constantly, while the delivery capacity of the sluggish Saudi bureaucracy continues to lag. Below the upper echelons, the Saudi state remains the deeply fragmented, bloated, and slow-moving machine that I described in my 2010 book. The government seems to have no clear strategy for reforming this bureaucracy
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Local economic advisors fear that the majority of private petrochemicals firms — the most developed part of Saudi industry — would lose money if prices of natural gas, their main input, increase to American levels.
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public sector employment remains the key means of providing income to Saudi nationals. Cheap foreign labor dominates private sector employment, thereby keeping consumer inflation at bay and business owners happy. Citizens, however, are parked in the overstaffed public sector. Out of every three jobs held by Saudis, roughly two are in government. The average ratio around the world is one in five. Public sector wages account for almost half of total government spending, among the highest shares in the world
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As limits on government employment kick in, young Saudis will increasingly have no choice but to seek private jobs. But they will face tough competition on the private labor market where employers have become accustomed to recruiting low-wage workers from poorer Arab and Asian countries
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Saudi wage demands will have to drop further if private job creation is to substitute for the erstwhile government employment guarantee. For the time being, private job creation has stalled as the government has pursued moderate austerity since 2015 in response to deficits and falling oil prices
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The government has also underestimated how dependent private businesses are on state spending. The share of state spending in the non-oil economy is extremely high compared to other economies. Historically, almost all private sector growth has resulted from increases in public spending
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As long as oil prices remain below $70 per barrel, the goal of a balanced budget will cause pain for businesses and limit private job creation. This will pose a major political challenge at a time when an estimated 200,000 Saudis are entering the labor market every year. More than 60 percent of the population is under 30, which means that the citizen labor force will grow rapidly for at least the next two decades.
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It would be far more prudent to gently prepare citizens and businesses for a difficult and protracted adjustment period and to focus on a smaller number of priorities
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The key structural challenge to non-oil growth is the way the Saudi government currently shares its wealth, most notably through mass public employment — an extremely expensive policy that bloats the bureaucracy, distorts labor markets, and is increasingly inequitable in an era when government jobs can no longer be guaranteed to all citizens. A stagnating economic pie that might even shrink in the coming years must be shared more equitably.
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A basic income would not only guarantee a basic livelihood for all citizens, but also serve as a grand political gesture that could justify difficult public sector reforms. A universal wealth-sharing scheme would make it easier to freeze government hiring and send a clear signal that, from now on, Saudis need to seek and acquire the skills for private employment and entrepreneurship. The government could supplement this scheme by charging fees to firms that employ foreigners while subsidizing wages for citizens to fully close the wage gap between the two.
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Focusing on such fundamentals might be less exciting than building new cities in the desert or launching the world’s largest-ever IPO — but they are more important for the kingdom’s economic future. No country as dependent on petroleum as Saudi Arabia has ever effectively diversified away from oil