Development Policies in Saudi Arabia: Challenges and Opportunities

Executive Summary

This report explores the various economic development strategies and paradigms implemented by the Saudi state since the 1970s to encourage economic growth, stability, and diversification. Over the past several decades, the Kingdom has achieved remarkable gains in infrastructure and industry, particularly due to large-scale investments in hydrocarbons and downstream production. However, the country’s youth remain disenfranchised and largely have not benefited from the accumulation of oil wealth. As the inclusion of youth in the economy is vital for the nation’s political, economic, and social stability, Saudi Arabia faces an acute imperative to address the underlying factors stifling youth engagement and reimagine previous development theories.

Currently, two alternate economic visions compete for ascendancy in the Kingdom. The first vision urges Saudi Arabia to take advantage of its low oil cost and technical expertise to further expand petrochemical production downstream from oil, increasing investment in industries such as plastics. The second vision advocates instead for rapid diversification of the economy away from oil and into less volatile and more sustainable sectors such as tourism and entertainment.

Through historical analysis of dominant development strategies, this report analyses Saudi Arabia’s past approaches to economic development in context:

• First, Saudi Arabia established tariffs and import quotas – a strategy commonly known as “import-substitution industrialization” – to promote a domestic manufacturing base.

Under the leadership of King Faisal, Saudi Arabia briefly pursued this strategy in the early 1970s. However, the political and economic conditions of Saudi Arabia – notably the political opposition of wealthy Saudi merchant families that were traditionally entitled to monopolies on imports – made this approach unworkable.

• Next, Saudi Arabia attempted to drive industrialization through exports to foreign countries.

This approach was based on the growth trajectory of several economies in Asia, which underwent successful industrialization in the 1970s. However, this model also failed to work in Saudi Arabia, owing to the lower quality and higher price point of Saudi exports compared to their Asian rivals.

• Finally, the Saudi leadership pursued a unique approach to economic development consistent with its local conditions.

After the failure of import substitution and export-led growth, the Saudi state pursued a unique industrialization strategy based on the state’s natural advantage in oil production and downstream development. Because of Saudi Arabia’s comparative advantage in petroleum extraction, it pursued development in the petrochemical industry, such as the manufacturing of plastics.

Of the three economic approaches, the third has been the most successful, although Saudi Arabia continues to face significant economic challenges. The report considers several of these challenges in greater detail:

• Unemployment, particularly youth unemployment, remains very high.

More than half of the Saudi population is under the age of 20, and unprecedented numbers have attempted to enter the labor force in recent years. However, young Saudis accustomed to a higher standard of living must compete with foreign migrant workers historically willing to work for lower cost. While steps have been taken towards the “Saudization” of the labor market, this problem persists, with negative consequences for the Kingdom’s stability.

• State-run monopolies are run inefficiently and serve as an obstacle to economic liberalization.

Large and well-connected merchant families have become entrenched within the Saudi economy, operating large state-owned enterprises and discouraging innovation. Many of these families have political connections to the ruling Al-Saud family, making them difficult to dislodge or compete against.

• Corruption remains endemic.

Saudi Arabia has recently made several well-publicized and somewhat successful attempts to crack down on corruption, notably the Ritz-Carlton incident in 2018. However, there is evidence that it persists, particularly within the military and civil contracts.

Finally, the report evaluates the present approaches of the kingdom to economic development, particularly under the leadership of Crown Prince Mohammed bin Salman (MbS). Rather than establishing the “correct” way to pursue industrialization, the report charts a compromise between alternative development theories, recognizing both the need for further investment in downstream oil production and the necessity for economic diversification.  Without firmly committing to one development vision or the other, the report makes several recommendations to increase overall efficiency:

• In light of the COVID-19 pandemic, Saudi Arabia should pursue fewer high-profile “moonshot” projects such as NEOM and focus on smaller, less expensive projects with immediate benefits.
• Saudi leadership should continue economic liberalization and encourage entrepreneurship among young, tech-skilled Saudis.
• Social liberalization should be continued, encouraging women’s rights and freedom of expression – as both of these will result in greater innovation and, therefore, economic gain.

The findings from this research enable a historically informed, comprehensive understanding of the challenges and opportunities posed by various economic development strategies in the Kingdom. In light of enduring youth unemployment and global economic decline as a result of the pandemic, robust, imaginative economic development strategies are urgently needed.

Read full report here