- - Sunday, April 10, 2016

ANALYSIS/OPINION:

If Saudi Arabia makes you think about oil reserves, venerable leaders and unbending ways, think again.

With oil prices plummeting, Saudi Arabia, the world’s leading petroleum exporter, is turning this crisis into an opportunity. In order to diversify its economy, Deputy Crown Prince Mohammed bin Salman announced in an interview with Bloomberg the establishment of a $2 trillion sovereign wealth fund, financed by selling off state petroleum assets and focused on investing in strategic industries.

In other revolutionary transformations, Saudi Arabia is accelerating the development of its free markets, nurturing new industries, cutting government spending and encouraging women to enter the paying workforce. These changes follow the road map presented by the economic consultants McKinsey Global Institute, which recently reported that if Saudi Arabia “embrace(s) significant change,” it can double its Gross Domestic Product by 2030, while creating up to 6 million new jobs and raising household incomes by 60 percent.

Saudi Arabia starts from a strong position. When oil prices were rising or stable, from 2003 through 2013, its economy expanded, becoming the 19th largest in the world and creating almost 4.4 million jobs, with Saudis filling 1.7 million of them. While the Kingdom could simply stand still, hoping that the good times will return, its leaders deserve credit for choosing the course of change.

As Saudi Arabia modernizes, Western policymakers and investors should lend a hand. With a stronger economy, Saudi Arabia will be better able to fight terrorism, promote regional stability and serve as a counterweight to expansionist powers. For international investors, the new Saudi economy will offer expanded opportunities to participate in newly privatized enterprises and get in on the ground floor of expanding industries such as petro-chemicals, healthcare, solar energy and tourism.



These far-reaching reforms reflect the role of the hard-driving, 30-year-old Prince Mohamed, who chairs the Council on Economic and Development Affairs. With 70 percent of Saudis 30 years or younger, Prince Mohammed represents a rising generation.

With the government paying the tuitions of Saudis who study abroad, over 125,000 young people are enrolled in overseas colleges and universities, mostly in the United States, and 30,000 come back every year with western degrees. Women of all ages are taking paying jobs and serving in public offices.

Facing the need to create new jobs for these college graduates and other entrants to the workforce, as well as fill the gaps left by lost oil revenues, the Saudi government is embracing transformative change.

Saudi Arabia is privatizing parts of Aramco, the iconic state-owned corporation that is the world’s leader in hydrocarbon reserves and crude oil production. In yet another dramatically disruptive initiative, the government will stop subsidizing electricity, fuel and water for its 28 million people. Instead, there will be targeted assistance for the poorest Saudis.

Having government live within its means, diversifying its economy, and encouraging domestic and international investment are the goals of Saudi economic reforms, many outlined in the budget submitted in December.

Even with the budget cuts that began last year, the Kingdom’s finances will be unsustainable within several years. In order to eliminate the structural deficit in its budget, the government is exploring privatizing services like healthcare and education, in addition to instituting a 5 percent value-added tax on non-essential goods, while exempting such stables as water and milk. Seeking to cut government spending and promote private investment, Saudi planners are proposing privatizing not only Aramco but also other state-owned enterprises, including the power stations, telecommunications companies and the national airline.

While shrinking the public sector, Saudi policymakers are striving to expand and diversify the private sector. The goals: increasing private-sector wages from 19 to 58 percent of total household incomes and non-oil revenues from 10 percent to 70 percent of the total government revenue.

The Saudis are following McKinsey’s recommendation to target eight promising sectors — mining and mills, tourism, petrochemicals, finance, manufacturing, construction, healthcare and retail — which together can produce 60 percent of the projected growth.

Small and medium-sized enterprises are essential to an expanding entrepreneurial economy. For instance, thousands of small private businesses are already involved in “downstream manufacturing” in the mining sector, producing copper wire, aluminum products and brass fixtures. In order to help such companies grow and generate jobs, the newly created Public Authority for Small and Medium Enterprises is helping these firms to obtain credit from the banking sector.

Mining and metals can generate half a million new jobs, while petrochemicals, downstream from oil production, can create $30 billion in new economic activity. Islamic tourism to the Holy Sites can employ 1.3 million more workers, and the retail sector, now growing by 12 percent a year, already employs 120,000 Saudi women and is expected to hire many more.

History judges nations by whether they adapt to economic, social and geopolitical transformations. Saudi Arabia is proving that it has the courage to change.

Edward Burton is the president and chief executive officer of the U.S.-Saudi Arabian Business Council.

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