By Yannis Gatsiounis
Saudi Arabia’s Vision 2030 plan is designed to diversify the economy away from oil. The government hopes this will happen within the next 20 years. The plan will be backed by a $2 trillion sovereign wealth fund – the world’s largest – and will move the country away from its main revenue stream.
All-encompassing national transformation plans are nothing new. From communist Russia and China to developing free markets like Malaysia and Kenya, the common thread among their adopters is anxiety about the future. They imbue nations with a sense of purpose and pride – and in doing so can buy their leaders additional time in power. But the future their architects envision is often unrealistic. They heavily rely on some resources at their disposal, such as money, and underestimate the importance and difficulty of nurturing other resources, like institutions and human capital. Every country must work within its constraints and set realistic goals to succeed. And money doesn’t buy your way past those constraints, even though it does allow you to more effectively work within them.
Minding a Country’s Constraints
When devising a plan to transform a country’s economy, it is key to consider the constraints within which the government must operate. Take Malaysia as an example. In 1986, Malaysia, experiencing high growth rates from growing oil revenues, embarked on Vision 2020, a plan to fully develop the country by that year. The plan included the formation of a national automaker, a cyber city to rival Silicon Valley and agricultural initiatives to lift the country’s mostly rural population out of poverty. But the leadership overlooked key inhibitors, like the country’s racialized political landscape, which would perpetuate patronage and undermine meritocracy. The country invested in “smart” schools but didn’t train teachers to make proper use of the technology. Private sector leaders were chosen, then groomed, not for their talent but their devotion to political leadership. Last year, Malaysia’s former prime minister Mahathir Mohamad and the architect of Vision 2020 admitted that the dream won’t be achieved, citing less than optimal levels of education, industrialization and productivity and low wages.
It is useful to compare the outcome of Malaysia’s transformation plan thus far to Singapore. Singapore was briefly part of Malaysia and when the two split in 1965, Malaysia got the better slice of the pie, rich in oil, timber and tin. Singapore’s portion was more like a crumb. It lacked land and natural resources. It was hemmed in by its rival, Malaysia, to the north and an increasingly nationalistic Indonesia to the south, west and east. Economic viability thus became a security imperative.
The island state’s major advantage was being situated on the southern tip of the Malay Peninsula, which sits on routes traveled by up to 40 percent of the world’s sea trade; port infrastructure naturally followed. But what was infrastructure without a system to leverage it? Whereas other countries relied disproportionately on building infrastructure to try to reach their development goals, Singapore concentrated on the arduous and unglamorous task of making its government efficient and clean. It focused on industries like banking, biotech and software engineering, which did not require natural resource inputs that the country didn’t have. It established a social and economic environment that was inviting to foreigners, who today comprise about one-fifth of the population and are a key driver of the economy. Therefore, Singapore recognized its limitations and focused its economic strategy on its advantages, something Malaysia has failed to do.
Setting Realistic Goals
Many complex factors influence economic transformation or failure. But these grand visions are often derailed by a failure to properly account for a country’s weaknesses and set attainable goals. A useful example of this is China’s Great Leap Forward, which sought to industrialize the country on the backs of peasants. Also, Gamal Abdel Nasser’s National Charter rewrote Egypt’s constitution and included a long list of ambitious goals that the country did not have the capacity to achieve, such as providing universal health care, greater women’s rights, free education and massive infrastructural advances like the widening of the Suez Canal.
When there is a disconnect between goals and capacity, public and political support tend to wane and execution becomes a distant dream. In “The Philosophy of History,” Hegel wrote, “A state is then well constituted and internally powerful, when the private interest of its citizens is one with common interest of the State; when the one finds its gratification and realization in the other.” Collectivization in the Soviet Union alienated the peasantry, and revolt followed. Malaysia’s national automaker, Proton, shrunk to 21 percent of market share in 2013 – after reaching 74 percent within its first decade – due to poor design and lack of reliability. The private and common interest Hegel spoke of had been severed.
In Rwanda, the country’s Vision 2020 plan aims to transition the economy from a focus on subsistence agriculture to knowledge-based sectors – essentially leap-frogging the industrial phase entirely. Rwanda’s economy grew 6.5 percent last year, with services accounting for 47 percent of GDP, according to government statistics. The country hosted a World Economic Forum in May and was named by the World Bank as the easiest place in Africa to do business, having earned the ranking through cutting red tape, tax incentives and better governance. However, the bulk of the country’s private sector is informal and 30 percent to 40 percent of its budget comes from foreign aid. Most Rwandans subsist on agriculture and the secondary school enrollment rate is around 40 percent. This all casts doubt on the Rwanda Development Board’s claim that “Rwanda is sure to be the Singapore of Africa by 2020.”
In contrast, Japan’s post-war “Policy Concerning Industrial Rationalization” leveraged the capital, construction assets and production machinery of the zaibatsu – the established business and financial conglomerates – to double steel production. Japanese workers dedicated themselves to their corporate employers. Similarly, Israel capitalized on its highly skilled workforce to “make the desert bloom.” Other countries embarking on transformation projects would be well served to take lessons from these two successful models.
Saudi Arabia’s Ambitious Plan
Saudi Arabia’s transformation plan has set an ambitious goal of ending the country’s reliance on oil, but it is not the first time Saudi Arabia has attempted this. In 2005, it launched the $100 billion King Abdullah Economic City, a megaproject that would develop a city along the Red Sea envisioned to be bigger than Washington, with two million residents and one million jobs by 2020. The city’s population now sits at 5,000 and the 2020 target has been scaled back to 50,000.
The kingdom’s Vision 2030 could be different. Its architect, Deputy Crown Prince Mohammed bin Salman, son of King Salman, says he is planning a restructuring of the entire government. On May 7, King Salman announced he was replacing his oil minister and restructuring some top ministries. More overhauls of both the public and private sectors are expected in an “all-encompassing economic and social plan” that the crown prince says will reflect his generation’s priorities – which differ from previous generations – including possibly more rights for women. The prince is planning an initial public offering that would sell less than 5 percent of Saudi Aramco, the state oil firm, in international markets, which would allow the country to diversify into non-oil industries. As with nearly every national transformation plan, this one will look to curb corruption and promote transparency – in a kingdom defined by clannish secrecy. The prince is raising taxes and reducing subsidies to raise $30 billion by 2020, a plan that will depend on reducing corruption or risk losing public support.
Vision 2030 also calls for halting plans for a portion of King Abdullah Economic City and six other planned industrial cities, which were also designed to diversify the economy away from oil.
Like every transformation plan before it, Vision 2030’s success will depend on support from key influencers and the broader public. Religious conservatives are among the most powerful members of Saudi society and are likely to resist a plan calling for looser social codes and greater outside investment. At the same time, they depend on the House of Saud for their power. Securing support among the young – who make up more than 50 percent of the population – could go a long way in blunting conservative influence.
In addition, this transformation plan is motivated by the government’s urgent need for cash. Ninety percent of government revenues are from oil, and dropping prices has led to spending cuts and heavy borrowing. The country ran a deficit of 21.6 percent last year, up from 3 percent in 2014. And geopolitically, Saudi Arabia is not exactly on firm footing. It’s embroiled militarily in Yemen and with the Islamic State. Friction with the U.S. is high, amid waning dependency on Saudi oil and fears that the U.S. is growing closer to Iran. As we’ve discussed previously, Saudi Arabia is in many ways a failing kingdom.
Vision 2030 is promising a dramatic turnaround. While it could happen, history has not been kind to most who have tried.