Reforms spearheaded by Saudi Arabia‘s crown prince may be insufficient to wean the economy from its addiction to oil and create a thriving private sector able to generate sufficient jobs, economists and analysts say.
Since Mohammed bin Salman cracked down on corruption earlier this month, some observers have voiced concerns about the impact of political risk on his plans, amid fears of a backlash.
“Nobody actually expects Vision 2030 to be fully implemented, but it is an attempt to show the world that there is a direction of travel away from oil,” Jane Kinninmont, a senior research fellow at the Chatham House think-tank in London, told Al Jazeera.
“Ultimately, success depends on the willingness of foreign investors to put their money in the country, and there are some concerns at the moment about political risk, which are not helping the country get the levels of investment they need.”
The kingdom has long tried to diversify away from its dependence on oil, but this effort has gathered pace with the collapse in prices since 2014.
Unveiled last year, Vision 2030 is a radical strategy by Mohammed Bin Salman – popularly referred to as “MBS” – to kick-start development of the non-oil private sector.
His ambitious targets envisage increasing the private sector’s contribution to GDP from 40 to 65 percent.
Reform is crucial if the Saudi government is to defuse a demographic time bomb that makes it essential to create jobs – fast.
Jason Tuvey of Capital Economics in London said that as many as 5.5 million new workers could enter the Saudi labour force by 2030.
“The working-age population is expanding rapidly. UN estimates suggest that, by 2030, it will rise by more than a quarter. This is one of the steepest rises in the emerging world,” he said.
The shrinking Saudi state cannot provide enough jobs for these new workers and unemployment is growing, hitting 12.7 percent earlier this year, underlining the priority of private sector growth.
“While the scope of the programme is impressive, it will face numerous implementation challenges and still fails to address several key issues holding back economic growth,” Tuvey said.
“The result is that Vision 2030 is likely to fall short of its lofty intentions.”
There are a number of reasons for the scepticism. While diversification has been a policy priority since the 1970s, efforts have often fallen short of targets.
Research at Chatham House suggests that Vision 2030’s ambitious goals could reflect a long tradition of “optimism bias” in Saudi diversification plans aimed at grabbing international attention.
One example of such lofty ambitions came with the announcement in October of proposals to build a vast new $500bn economic zone on the Red Sea called “Neom”.
“Neom has helped Saudi Arabia to make a splash and rebrand itself, but I think it is highly unlikely that they will be able to secure that volume of inward investment at a time when the Saudi system is changing so dramatically that there is quite a lot of political uncertainty,” Kinninmont told Al Jazeera.
Observers also believe there are clear limits to Saudi Arabia’s ability to wean itself from oil.
Saudi Arabia is pumping 12 million barrels a day, with hydrocarbons accounting for 50 percent of GDP and most government revenue.
Its non-oil private sector also shows few signs of stepping up: Tuvey said that in 2016, it recorded its worst performance since the late 1980s.
Private businesses have been held back by a range of problems that have kept productivity levels behind other G20 economies. Weak productivity has depressed wages, meaning Saudi nationals prefer working in government jobs where salaries are higher, swelling the bureaucracy.
One sign of private sector weakness has been falling levels of foreign investment, and Saudi Arabia languishes at 92nd out of 190 countries on the World Bank’s Ease of Doing Business 2018 list.
At a conference last week in London, market commentator Simon Constable said the conditions necessary for a vibrant private sector include a robust rule of law, low corruption, a small bureaucracy, and limited government involvement in the economy.
“Saudi Arabia can transition away from oil, but these factors are key,” he said. “I think it can be done, but will it be easy? No, it will need a lot of changes.”
There are also huge social challenges to diversification, not least the fact that Saudis lack the skills to work in the private sector, despite high government spending on education.
World Economic Forum’s Global Competitiveness Report sees the inadequately educated workforce as one of the most problematic factors when it comes to doing business.
While Vision 2030 does outline educational reforms, Tuvey says “the government has shied away from a much-needed overhaul” and its targets are “far from ambitious”.
Finally, the radical scope of Mohammed Bin Salman’s reforms have prompted some observers to ask whether a backlash is possible, especially among potential losers in the reform process, such as young men.
“Some have argued that a consolidation of power could make it easier for MBS to push ahead with the Vision 2030 reform plans. But as we’ve noted before, there’s a risk of a further shift away from consensus-based policymaking. The big risk here is a backlash against MBS that undermines his authority and threatens Vision 2030,” Kinninmont said.
“There is a risk of a backlash, but the form that that might take is very unclear. Mohammed Bin Salman is breaking many of the traditional rules of the Saudi system, and certainly, there will be opponents of the changes.”
Recent economic wobbles have clearly not helped to bolster confidence. Crude prices have fallen 15 percent this year to well below levels the government needs to balance its budget.
While commending the reform efforts, in July, the IMF revised its forecast for Saudi growth this year down to just 0.1 percent.
“Vision 2030 is not overambitious – the actual vision is what the economy needs. There is no choice other than ambitious reform,” Marcus Chenevix, MENA analyst at TS Lombard in London, told Al Jazeera.
“If we see things like labour reform, something like the unpegging of the riyal, then yes, it could work. But right now, with the agenda we are looking at, this won’t happen.”