By Arab News
Dr. Naser Al-Tamimi*
Economic diversification is defined by the UN as a strategy to transform the economy from one source of income to multiple sources across different sectors, and with the participation of large segments of the population.
In this context, economic diversification can be measured by determining how different sectors contribute to the gross domestic product (GDP), the concentration of exports, the extent to which the country relies on certain commodities, and the share of labor across different industries. However, export concentration is still widely used as a measure of economic diversification.
The World Bank has classified the various factors affecting economic diversification into three categories. The first is economic reform, which can include trade liberalization, investment promotion, cutting red tape, and providing financial credit lines for small- and medium-sized enterprises (SMEs). The second area involves structural factors such as demographics, human capital, institutional development, infrastructure and quality of education. Then there are the macroeconomic variables, such as the real exchange rate, inflation, net foreign direct investment inflows and terms of trade.
In addition, there are factors such as competition, monopolies, the distance between markets, and the size of markets.
International examples show that diversifying the economy away from oil is a difficult and time-consuming strategy that may take at least two decades. The International Monetary Fund (IMF) cites three countries — Malaysia, Indonesia and Mexico — as among the best examples of those that have successfully diversified their economies away from oil or natural resources.
All the countries that have, to some extent, succeeded in diversifying their economies or exports have enjoyed three main advantages: The availability of cheap labor, which has supported labor-intensive industries such as agro-industries and textiles; a domestic political framework, featuring political consensus, power sharing or democratic transition; and a regional or international environment that encourages further diversification.
Saudi Arabia lacks some advantages that have facilitated economic diversification elsewhere, such as cheap labor, favorable regional or international conditions and, most importantly, the implementation of economic reforms before the decline in oil prices.
Although numerous international institutions — including the IMF, World Bank, and credit-rating agencies — have welcomed economic reforms in Saudi Arabia, many agree that it is a long, difficult, and challenging road ahead. Others are even more pessimistic and argue that economic reforms will eventually not succeed.
Certainly, government-led plans cannot achieve everything, particularly given the Kingdom’s economy, which has relied heavily on oil exports for nearly eight decades. In addition, the Saudi government is dealing with complex and changing issues such as private-sector development, restructuring the education system, and addressing the imbalance in demographics and labor market, which will take years to reform.
Moreover, there are no economic reforms free of pain. There are winners and losers. Here lies the role of the Saudi government in developing an effective social safety net that relieves the burden on low-income groups or those in need of governmental support, such as SMEs.
Thus, the coming years will be the most critical in the reform process, as goals are translated into policies, responding to the changing local or regional economic and political environment, and dealing with people’s shifting expectations. Importantly, there is a need for an efficient, independent, credible, and transparent administrative agency or institutions that have the necessary tools to move forward with economic reforms.
Importantly, the reforms in Saudi Arabia will be implemented under different conditions compared to most global examples of economic diversification. Riyadh is racing against time and is up against an unfavorable external environment that includes low oil prices, weak global growth, escalation of protectionist measures and a volatile regional order. All these conditions, if they persist, are likely to dampen economic growth and ultimately affect the implementation of reforms in Saudi Arabia.
It is certainly a long and difficult road ahead — and the policymakers in Riyadh need to clarify this matter to citizens in a transparent and frank manner.
• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on e-mail: [email protected] Twitter: @nasertamimi