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Developments 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 visions compete for ascendancy in the Kingdom: further development of production downstream to oil, and diversification of the economy into sectors like tourism and entertainment.

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

  • 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 presence of merchant families that were traditionally entitled to monopolies on imports – made this approach unworkable.

  • 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.

  • The Saudi leadership pursued a unique approach to economic development consistent with its 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. This approach has been

fairly successful, although Saudi Arabia continues to face challenges such as corruption, inefficiency from state-run monopolies, and high youth unemployment.

Finally, the report evaluates the present approaches of the kingdom to economic development, particularly under the leadership of Crown Prince Mohammed bin Salman (MbS). Ultimately, 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. The importance of diversification is especially clear in light of the COVID-19 pandemic, which has drastically impacted the oil sector and placed the future of the Gulf economies in question.

The findings from this research enable a historically informed, comprehensive understanding of the challenges and opportunities posed by various economic development strategies in the Saudi 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

Jean-François Seznec’s focus is on the growth of energy-based industries, such as petrochemicals, aluminum, or steel, in the Gulf. He is a non-resident scholar at MEI, a non-resident senior fellow at the Atlantic Council, and an adjunct professor at Johns Hopkins’ School of Advanced International Studies. He has 25 years of experience in international banking and finance, ten of which were spent in the Middle East.

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