Remarks at the Symposium on “Balance of Powers and Saudi Arabia’s Role in the World Economy”

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Amb. (ret.) Richard J. Schmierer

MEPC President and Chairman of the Board; former Ambassador, Oman.
February 12, 2018

Thank you Dr. Al-Kuthairi for your generous introduction, and thank you to the Saudi Arabian National Guard — and in particular the organizers of the Junadriyah Cultural and Heritage Festival — for the invitation to participate in this symposium: “Balance of Powers and Saudi Arabia’s Role in the World Economy.”

My presentation this evening will focus on three aspects related to the topic of this symposium. First, I will touch on the size and importance of the Saudi economy, both globally and regionally. Second, I will examine its traditional structure and functioning as they have developed since the Kingdom began earning revenue from energy exports. And, third, I will review current efforts to diversify, reform and modernize the Saudi economy along the lines of Saudi Vision 2030.

On the first of these topics — the size and importance of the Saudi economy — a brief look at some economic statistics concerning the Kingdom underscores the important global economic role that the Kingdom plays. The Saudi economy is the largest in the Arab world, a status it has held for some time. It is the 15th largest economy globally. And, of course, it plays an outsized role in the global energy sector.

With the second-highest proven oil reserves in the world — amounting to 25% of the world’s total — and the fifth-highest proven gas reserves, the Kingdom is a key player in the functioning of international energy markets. And it has played that role well. Specifically, as the world’s largest oil exporter, and the country with the largest spare oil production capacity, Saudi Arabia has used its role in energy markets over the years to help foster and maintain market stability and price moderation, much to the benefit of both producers and consumers.

Another important role which the Saudi economy plays in the region, and beyond, has been as a source of remittances to less wealthy countries. The economies of several of the Kingdom’ allies and neighbors — including Egypt, Jordan, Yemen and others — have benefitted from the approximately 150 billion Saudi Riyals remitted abroad each year.

In addition to the global importance of the Saudi economy itself, since becoming a major player on the world economic stage, the Kingdom has taken on a significant role in the international financial system. It is an influential member of both the G-20 and the World Trade Organization, as well as a key member of the World Bank and International Monetary Fund.

Thus, through its own economic activity as well as its role in the major international economic, financial and trade institutions, Saudi Arabia is a key contributor to the functioning and success of the global economy.

Let me now turn to my second major topic, the nature of the Saudi economy as it has emerged in the oil era.

For the past several decades the Saudi economy has been dominated by the energy sector, primarily by revenue from petroleum exports. The income derived from such economic activity has enabled the government to provide citizens and residents of the Kingdom with generous support for many commodities and services. The government has provided across-the-board subsidies for water, electricity, gasoline and certain food staples. It has also provided free health care and free education through the tertiary level, and has had programs to support housing and other basic needs. Moreover, the government has been the employer of last resort, leading to a labor-force structure in which some 70% of employed Saudis work in the public sector.

This economic approach has been challenged in recent years by two developments: (1) rapid population growth, and (2) fluctuating oil revenue. In the early years of the Kingdom’s oil economy, Saudi Arabia had a relatively small population, fewer than ten million residents as late as 1975; today, that number stands at more than 30 million.

As the population of the Kingdom has experienced such rapid growth, its revenues from energy exports have seen highs and lows, making it difficult for the Saudi leadership and the Kingdom’s economic planners to project future revenues and to adjust government expenditures accordingly.
A decline in oil revenues in recent years — triggered primarily by a decline in global oil prices from over $100 per barrel to below $50 per barrel — has underscored the fact that, for future economic stability and predictability, the Kingdom needs to pursue a new economic course.

This brings me to the third and final topic I would like to address in my remarks — the ongoing initiative to diversify, modernize and reform the Saudi economy as laid out in Saudi Vision 2030, a program which was first announced in April 2016.

Let me start by noting that the Saudi government has been quite proactive, and effective, in engaging with officials, opinion leaders and others, certainly in Washington, DC, to explain and seek support for the goals of Vision 2030. And the first talking point that Saudi spokespersons deliver when discussing Vision 2030 is that it is not primarily about economics, but rather that it is about Saudi society; its focus is on the quality of life of the citizens and residents of the Kingdom. Nonetheless, Vision 2030 does embody several significant economic elements which, taken together, will fundamentally transform the Saudi economy. Let me mention eight such elements:

First, Vision 2030 addresses inefficient and wasteful subsidies whose reduction or elimination will lead to more effective and efficient use of resources. Already, significant steps have been taken to reduce subsidies for water, electricity, gasoline and other commodities. Importantly, this year the government plans to introduce what it calls “Citizens’ Accounts,” which will be used to provide direct assistance to those in need in light of reduced economic subsidies.

Second, Vision 2030 supports the creation of new or expanded economic sectors. Two of the most interesting of these are the entertainment and tourism sectors. The former will contribute significantly to Vision 2030’s aim of improving the quality of life in the Kingdom, and the latter will have the bonus of enabling more foreigners to get to know the Kingdom better. Both sectors will boost the Saudi economy and increase the employment of Saudis.

Third, through Vision 2030 new taxes will be introduced which will increase government revenues but, more importantly, will increase economic efficiency. This is nowhere more significant than in the area of land use. A new tax scheme affecting land use will help address the current housing shortage in the Kingdom by fostering increased housing availability and decreased housing costs.

Fourth, Vision 2030 entails efforts at combating cronyism and corruption, which will lead to more efficient, transparent and cost-effective business practices, including in government procurement and contracting.

Fifth, Vision 2030 aims to curb elite entitlements, a message which has already been very effectively conveyed to the Saudi people.

Sixth, Vision 2030 incorporates major elements related to employment. The government has recently announced several sectors of the labor force which will be restricted to Saudi citizens. Importantly, Vision 2030 specifically aims to increase the participation of Saudi women in the work force. From a current level of around 22% of the labor force, the plan seeks to boost women’s participation to 30%. Given the large number of talented and well-educated Saudi women, this expansion of Saudi women’s employment will be a major boon for the Saudi economy as a whole, as well as for Saudi women and their families. Another important element embodied in Vision 2030’s approach to the labor force is a shift from public sector to private sector employment.

Seventh, Vision 2030 seeks to privatize certain economic sectors which are currently dominated by the government. These include some aspects of health care and education. The increased efficiency which will result from such privatization will be yet another plus for the Saudi economy.

Eighth, and finally — but by no means least important — Vision 2030 includes an initial public offering of 5% of the world’s most valuable company — Saudi ARAMCO. Not only will this step provide significant revenues to the Saudi government, but it will also represent a watershed event in the Kingdom’s economic evolution to greater transparency.

These significant economic elements of Vision 2030 do not come without significant challenges. One of these is ensuring good communication between the Saudi leadership and the Saudi people concerning the plan and its implementation. To date, this effort seems to be going well.

A second challenge is to calibrate an appropriate pace of implementation for the significant changes entailed in Vision 2030. In my several visits to the Kingdom since the announcement of Vision 2030 I have heard Saudi interlocutors express concern both with what some consider too-rapid change, and from others impatience that change is not coming fast enough. Interestingly, in my experience I have found, in general, that the older the interlocutor the greater the concern with possible too-rapid change, and the younger the interlocutor the greater the impatience for even more rapid change. This suggests to me that, at this point, the Saudi leadership is calibrating the pace of implementation of Vision 2030 just about right.

The broad support among Saudis for Vision 2030 — especially among younger Saudis, whose futures will be most directly impacted by the plan — suggests that its implementation will largely be a success. This is good news for Saudi citizens, and good news for those non-Saudis, like me, who wish the Kingdom and it’s people well.

Thank you.

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

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