Diary

How the World’s Leading Oil State is Embracing Capitalism

In the days when oil was well over $100 a barrel, Saudi Arabia’s public sector employees lived comfortably without needing to break much of a sweat. Last month, those employees (who make up 90% of the latest Saudi workforce, depending on how you count) got a rude shock: a 20% pay cut for government ministers and employees, with bonuses cancelled to boot. With the drop in oil prices, the Kingdom’s finance’s look dire: the Saudi government has already burned through over $150 billion in foreign reserves. Aiming to reverse the situation, Riyadh has resorted to reducing perks, cutting subsidies, and raising fees for various government services.

The cutbacks signal the beginning of some fundamental changes for the Saudi economy. Government jobs have long been seen as a “cushy” way of soaking up unemployment, requiring little effort and paying comfortable wages and benefits. While Saudis joined the government ministries en masse, lower-paying and more demanding private sector jobs mostly went to foreigners. With the oil crash, this state-centric economic model has suddenly become unsustainable: with around 70 percent of government revenue coming from oil, the Kingdom can no longer afford to pamper its citizens.

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Instead, the Saudis are finally embracing the free market. The Kingdom recently unveiled a “National Transformation Program” aimed at reducing state bloat and weaning the government off oil. The government hopes its reforms will bring unemployment down to 9% (currently at 11.6%) and bring more women into the workforce, all while generating $140 billion in revenue from non-oil sources by 2020 and adding as many as six million jobs to non-oil sectors by 2030. Saudi is also planning an IPO of Saudi Aramco, the state oil company valued at between $2 trillion and $2.5 trillion. By selling sell three to five percent of the company in 2017, the Saudis aim to generate cash for their $2 trillion sovereign wealth fund.

Critically, the Saudi government’s plans to create private sector jobs hinge on foreign firms (especially the American and British firms already doing brisk business in the Gulf) setting up shop in their country. They have already notched one victory, with General Electric (GE) committing to investing $1.4 billion, doubling its workforce, and building a new manufacturing facility. The Saudis are also taking advantage of the Brexit referendum to position themselves and their smaller neighbors as a new trade and investment partner for the new, outward-looking United Kingdom. The feeling appears to be mutual for the Brits, considering their new international trade minister Liam Fox chose the GCC-British Economic Forum as the venue for his first official speech.

As Saudi tries to coax foreign dollars (and pounds), the protectionist barriers of the past are tumbling down. The Saudi Capital Market Authority recently announced that individual foreign investors will soon be able to own 10% of listed Saudi companies (double what they can hold currently) and planning to cut the assets those investors need to have on hand in order to purchase stocks. Beginning in the first half of 2017, the government will also give investors two days to settle trades, ditching their much-disliked same-day trading system. In addition to the Aramco IPO, the kingdom is looking into selling hundreds of other state assets.

The other side of that coin involves investing abroad. Riyadh’s investment arm has already picked up a $3.5 billion stake in Uber, one of the largest ever investments of its kind. In addition to deals in the US and the UK, the Saudis have set their sights on Asia, seeking investments in oil refineries in countries such as China, India, and Indonesia. Prince Salman recently met with Japanese Prime Minister Shinzo Abe, where they discussed various economic initiatives, including the renewal of a deal to store 6.29 million barrels of crude at Okinawa.

These moves all make for good business headlines, but this step away from oil-funded state-run economics toward the world of free trade and free markets is ultimately the result of a realization by the Saudi royals that their system is just no longer tenable. Even if the “transformation program” doesn’t promise any political changes to the absolute monarchy, the Saudi leadership is accepting another type of freedom that can be just as important: economic liberty. As the bureaucratic obstacles to business come down (for both Saudis and foreigners), entrepreneurial young Saudis will be freed of their country’s stodgy regulatory mess and will be able to create their own firms.

Critics of the Saudi economic reforms argue that young people in the country lack the skills to compete in the open market, but those shortcomings are the natural result of Big Government serving as both crutch and hindrance. After all, why would any young professional put in extra effort if they knew they were set for a carefree government job and could never aspire to anything more? With the crutches removed, Saudi’s young people will quickly realize they can stand on their own two feet. There is a lesson for America here: however often socialist Democrats like Bernie Sanders use promises of free education, healthcare, and other goodies to build up fanatical followings of liberals and college students, the piper eventually needs to be paid.

All of that being said, the road ahead will be bumpy. As the countries that threw off the yoke of communism learned a few decades ago, capitalism does not come easy when people have been conditioned to expect state control and lowered expectations. Nor is this the first time Riyadh has made bold promises when it comes to changing how it does business. The Kingdom has tried its hand at pro-market reform more than once before, to no avail. Considering that oil prices don’t look to be going anywhere anytime soon, though, this is as good a time as any to try again.