Saudi Arabia’s Reform Path

BEIRUT – Nearly two years after oil prices began their precipitous decline, leading global producers are facing the prospect of major adjustments that will have far-reaching economic, social, and political consequences. While such adjustments will surely be enormously challenging – especially for middle-income countries like Saudi Arabia, which lack the massive wealth funds of, say, the United Arab Emirates – they present these countries with an important opportunity to consider more productive ways to organize their societies.

It seems that Saudi Arabia has embraced this challenge. The long-time oil minister was replaced last week, soon after the Kingdom issued its Vision 2030 plan for ensuring sustainable long-term growth. The plan has been both hailed and criticized for its ambition, exemplified by the goal of turning the Kingdom into the world’s 15th largest economy over the next two decades – an economy characterized by its skilled labor force, open markets, and good governance. One key way Saudi Arabia hopes to achieve that is by diversifying its asset portfolio, selling shares in the state oil giant Aramco to create a sovereign-wealth fund.

But Vision 2030 fails to address one critical issue: low labor-force participation. Only 41% of the working-age population currently is employed, compared to a 60% average across the OECD. Those who do work are employed largely by overstaffed public agencies. This is the Saudi economy’s largest inefficiency, and addressing it will be more difficult that addressing any other.

The key will be not just to increase employment, but also to boost productivity. After all, unlike more sparsely populated Gulf Cooperation Council (GCC) members, such as the UAE and Qatar, Saudi Arabia, with its population of nearly 20 million (excluding non-nationals), can no longer afford low labor productivity. Indeed, oil revenues now amount to only $5,500 per capita – far from enough to act as a sustainable alternative.