The dilemma is whether to use its wealth to invest around the world or to continue trying to develop new sectors at home in areas where it does not have an obvious natural advantage
How do you diversify an economy from over-reliance on one sector? It is a challenge faced, more than anywhere else, by Russia and Saudi Arabia. Both are massively dependent on petroleum exports to sustain their entire economies, but whereas Russia has no coherent plan to do so, this aim is at the forefront of policy in Saudi Arabia – which from an economic perspective makes the country one of the most interesting on earth.
As most people know, Saudi Arabia is both the world’s largest oil exporter and has the largest proven reserves. Fewer people are aware that it is the 19th largest economy in the world, about the same size as Switzerland, a bit smaller than the Netherlands and a bit bigger than Poland. Fewer still will be aware that it has had nine successive five-year development plans since 1970, all of which have sought to work towards it becoming a diversified economy, less reliant on oil. But they have had only modest success. Oil, gas and associated industries generated 42 per cent of the country’s GDP last year, 87 per cent of its tax revenues and some 90 per cent of its export earnings. The fall in the oil price over the past four years has naturally hit public finances severely.
Now there is a new and more radical plan. It was launched in 2016 by Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud and is called Vision 2030. It is a fascinating exercise, and the best place to start for anyone seeking to understand the country’s dilemma.
All resources are finite. That dilemma is whether it should use its wealth to invest around the world through its sovereign wealth fund to provide a flow of income for the day when oil and gas revenues decline, or whether to press on trying to develop new sectors at home in areas where it does not have an obvious natural advantage. Of course this is a both/and rather than an either/or, but the balance between the two strategies is important.