Mohammad bin Salman, Saudi Arabia’s youthful decision maker in chief, has unveiled an ambitious plan to wean the country off its addiction to oil. Key elements of prince’s plan include privatizing Saudi Aramco for around $2tn and putting the proceeds into the Kingdom’s sovereign wealth fund, likely making it the world’s largest with no less than $3tn in assets under management. The fund would be mandated to fund domestic investment outside the oil sector, in a desperate bid to diversify the Saudi economy.
The prince’s ambition is breathtaking. By 2030, non-oil revenues of the government are targeted to increase sixfold from $43bn to $264bn. And the share of the private, non-oil sector in the economy is slated to increase from 39 percent to 65 percent of GDP. How is this dramatic transformation of the Saudi economy to be accomplished? The plan identifies Islamic tourism, military equipment manufacturing, logistics hubs, and a revamped financial free zone in Riyadh as the key points of expansion.
The odds are daunting. To begin with, unlike the Norwegian model, Saudi oil revenues are unlikely to be impounded away into the sovereign wealth fund. Power in Saudi Arabia rests in the corporate body of the royal family (composed of some thirty thousand princes) that controls the Saudi state. Oil revenues account for 90 per cent of the government’s revenues, and fund both the ultra-generous cradle-to-grave welfare showered on the subjects and (opaquely) the private purse of the Al Saud. Any suggestion of impouding away oil revenues is therefore likely to generate tremendous opposition from both top and bottom of Saudi society. The sovereign wealth fund is therefore likely to be funded almost entirely by a one-off sale of equity in Saudi Aramco.
In effect, selling Saudi Aramco would convert a stream of future oil revenues into capital available to be deployed. It would make for a great strategy if the binding constraint on the growth of other sectors in the economy was capital scarcity. However, this is decidedly not the case. What is limited is not the amount of capital ready to be deployed, but the capacity of the non-oil, Saudi economy to absorb additional investment.
To put it concretely, the sovereign wealth fund would find it extraordinarily difficult to find enough viable domestic projects to invest a trillion dollars. Long before that number is hit, it would be funding marginal projects with negative net present values—meaning that it would be losing money on them. The plan, if carried out at length, would fail to extricate the Saudi populace from dependence on the state. If millions of Saudis leave state employment and go work in the expanding non-oil, private sector as envisioned, they would remain dependent on the largesse of the state. Moreover, significantly overweighting domestic asssets in the fund’s portfolio would systematically squander the wealth of Saudi Arabia.
The Saudis spend an enormous amount of money on military equipment; 98 percent of which is imported. The prince’s plan calls for 50 percent to be made in Saudi Arabia by 2030. Saudi know-how is extremely limited in this highly-skilled sector. If the target is hit, it would likely compromise the Saudi military’s already weak war-fighting capability. And expansion of this sector can hardly be described as rebalancing towards the private sector. Given Saudi industrial capabilities, any significant move in this direction is extremely improbable.
Islamic tourism looks like a more promising avenue of expansion, given the Kingdom’s monopoly in the market. The limitation here comes from Islamic tradition itself. The Muslim pilgrimage is overwhelmingly concentrated in the month of Ramdan. This creates an annual cycle characterized by excess capacity for most of the year. Moreover, this sector is already very well developed in Saudi Arabia. Both of these factors sharply limit how much additional investment can be absorbed by this sector.
As a logistical and financial hub, Saudi potential is limited by very strong competition from regional and global actors. Moreover, while both may absorb capital in copious amounts, the capacity of both sectors to generate employment is extremely limited. The imperatives of inter-modal transport require almost complete automation, whereas finance has always had a naturally limited employment potential.
Gause’s model of the rentier state will continue to apply to the Kingdom in 2030. The emergence of the rentier state was not the result of policy decisions. It was the outcome of structural realities. And these structural realities have not gone away.