Saudi Arabia, A Testbed for Change

The Gulf countries are laboratories where the answer to one of the most vexing questions of our time is being sought. Can petrostates—that is, nations whose economies rest almost exclusively on the production and export of oil and gas—diversify and generate other sources of economic activity and growth?

As the social, political and economic pressures to lower the world’s consumption of hydrocarbons mount, identifying and encouraging other sectors that could drive the economy have acquired unprecedented urgency for oil exporting countries.

Oil not only shapes a country’s economy, it also determines many traits of its state, its politics and even its culture. The options open to petrostates at this juncture are more determined by previous conditions and decisions than those of nations with more diversified economies. The influence of the past in defining the set of options available to a country or a company is what social scientists call “path dependence.” And petrostates suffer an extreme case of path-dependence. Can they break away from their past trajectory?

So far no petrostate has been able to develop a substantial non-oil economic sector. That is in part because when combined with a fragile system of democratic checks and balances, the economic dependence on oil revenues lead to dysfunctional politics and distorted economies, in short, to a petrostate. In countries with institutional strengths, a large private sector and an effective government, this need not happen. Norway and the United States are the usual examples of nations with large oil and gas sectors that have not suffered the ravages of what is commonly called “the oil curse.” For others, such as Nigeria or Venezuela, the dependency of their revenues on oil and gas exports creates a kind of autoimmune disease which feeds chronic inequality, corruption and poverty, while either undermining democracy or blocking it altogether. No petrostate has been successful in converting oil revenues into stable prosperity for the majority of its population. It’s not that leaders fail to realize they need to diversify their economies. In fact, all oil countries have invested massively in the development of other sectors. Few of these investments succeed, largely because overvalued exchange rates stunt the growth of agriculture, manufacturing, or tourism, making the countries less competitive in international markets. They also become highly vulnerable to the volatility of oil prices, which result in deeply damaging cycles of economic boom followed by an impoverishing bust. Not surprisingly, in petrostates, the fight over control and distribution of the nation’s oil rents often becomes the gravitational center of political life.

In nations in which the large-scale exploitation of hydrocarbons becomes the dominant economic activity before a strong state, effective institutions and internationally competitive private sector exist, a dysfunctional petrostate obtains. Once in place, the economic and political arrangements it nurtures become almost impossible to shed.

In the 1960s and, particularly during the 1970s, thanks to the spike in prices produced by the 1973 oil embargo, the Arab Gulf States: Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) were among the world’s fastest growing nations. Today they face the possibility of a permanent drop in their oil and gas revenues as their prices might enter a new phase of chronic weakness. This is a trend that many analysts consider irreversible. In a 2018 report for the Carnegie Endowment for International Peace, Jihad Yazidi and his colleagues warn that “the rentier model and its redistribution mechanisms, upon which Arab economies were built, have unraveled.”

In response to these threats, the Gulf States have announced ambitious plans to reform their economies and modernize their institutions and policies. The Saudi plan, titled Vision 2030, is perhaps one of the boldest and most comprehensive. It offers seven programs, each spelling out the actions that will be taken to boost, for example, industrial and financial development, improve the quality of life, achieve stable and sustainable fiscal balances and stimulate public investment. This is, in essence, an aggressive and unprecedented program of national transformation. Economic diversification efforts outlined in the Saudi plan emphasize skill training for the population, an expanding role for women and the young as well as better living conditions for the non-Saudi population. The plan calls for the privatization of state-owned enterprises and government services, for a bigger role for small and medium size enterprises and for what the authors call the “Saudization” of the renewable energy and industrial equipment sectors, with specific targets to be accomplished within the next two to three decades.

The Saudi plan is as necessary as it is audacious—and therefore risky. Reality and unexpected events often interfere, derail or even block the best thought-through plans. There is no reason to assume that, in this case too, unexpected events will fail to shape its execution and its outcomes. In fact, reality has already started to interfere. For example, the Saudi authorities have been forced to postpone the initial public offering (IPO) of the national oil company, ARAMCO. That IPO is an indispensable requirement for the financing of the plan. Women can now drive in Saudi Arabia, but the activists that led the movement that yielded that outcome have been jailed. These events undermine the trust—domestic and international—that is indispensable for the plan’s successful implementation.

Saudi Arabia’s reform plan is the most significant, visible and consequential, given that nation’s weight in the world’s energy and financial markets and its geopolitical role in a highly volatile region. But all the other petrostates of the Gulf region are facing similar challenges and have drawn plans to adjust to a world in which their current economic and political arrangements are untenable. They too will face the difficulties of implementing their plans in the face of significant obstacles. The world will be watching these experiments in large-scale national transformation with interest and anxiety. Their success matters, and not only for the nations that are trying to align their governments and societies to the realities of the 21st Century. What happens in the Gulf will not stay in the Gulf.

Moisés Naím is a senior associate of the Carnegie Endowment for International Peace, where he deals with economic research and international politics. He is the author and editor of over 10 books, including recently “The End of Power: From Boardrooms to Battlefields and Churches to States, why being in charge isn't what it used to be” (Basic Books, 2013). Naím is the chief international columnist for El País, and his weekly column is published worldwide. Before starting his collaboration with the Carnegie Endowment, Naím was chief editor of Foreign Policy magazine for fourteen years. He has held various public positions, including that of the Minister of Development of Venezuela (Fomento) in the early 1990s, director of the Central Bank of Venezuela and executive director of the World Bank. He has also taught economics and business administration and was academic director at IESA, Venezuela's largest institute of administration studies. He holds a bachelor's degree and doctorate (PhD) from the Massachusetts Institute of Technology.