By Ali Shihabi
A large banner shows Saudi Vision for 2030 as a soldier stands guard before the arrival of Saudi King Salman at the inauguration of several energy projects in Ras Al Khair, Saudi Arabia, November 29, 2016. REUTERS/Zuhair Al-Traifi

Last Thursday, April 25, was the three-year anniversary of Vision 2030. When it was launched, the immediate goal of Saudi Arabia’s blueprint for economic transformation was to enact necessary, and inevitably painful, structural reforms to Saudi Arabia’s economy and labor market in order to correct distortions created by decades of neglect and overreliance on oil rents. Such sweeping reforms will, by default, yield negative short-term consequences that will inevitably affect economic performance for several years to come.

Progress, consequently, should not be measured by short-term economic performance but by the degree to which the Saudi government is correcting these structural faults. By this measure, the government has thus far taken a big step forward in addressing core economic and labor market issues. Consequently, the country’s ability to tolerate a prolonged period of economic hardship will determine whether Saudi Arabia’s blueprint for socioeconomic transformation succeeds fully.

By December 2018, many Western observers seemed to have concluded that Vision 2030 was foundering. “Saudi Arabia’s Economic Overhaul Is Backfiring,” read one Wall Street Journal headline. Forbes declared, “The reality of the Saudi economy these days … is that reform efforts are being pursued in word more than deed.” The Economist agreed: “The progress is illusory. Dig past the headline numbers and … the results of Prince Mohammed’s reforms are disappointing.”

In support of their pronouncements, these analyses cited a steady stream of weak economic data. Evaluating short-term economic performance is, however, an imperfect measure: transforming the kingdom from an unsustainable welfare state into a viable market economy is the end product of a years-, if not decades-, long process that inevitably begins with a painful adjustment period. For Saudi Arabia, the immediate goal is to attain fiscal solvency, reduce dependence on foreign labor, and introduce regulations and structures that encourage efficiency, discourage waste, and allow for private sector growth.

By this measure, the government has made great progress to date.

Untenable energy and water subsidies are being gradually rolled back, with the price of some commodities and utilities, such as jet fuel and premium gasoline, already reaching global market levels. The state has stopped paying water, electricity, and other utility bills for thousands of royals. New bankruptcy, mortgage, fair competition, and intellectual property laws have taken effect. Moreover, the government has imposed a 5 percent VAT and levied financial penalties on foreign labor and companies that fail to employ adequate numbers of Saudi nationals.

Despite what skeptics say, the Ritz-Carlton detentions have had a tangible impact on corruption by sending an unmistakable message to the kingdom’s royal and merchant elites that decades-long illicit practices, such as skimming money from hyperinflated government contracts, will no longer be tolerated.

By forcing Saudis to revolutionize their consumption patterns, these disruptive changes are simultaneously a necessary antecedent to transforming the economy and the reason that many economic indicators are lagging. Ending government largesse and state subsidies has, for example, put the country on a more sustainable fiscal path, but it has also shrunk the construction sector, which relies heavily on government contracts, and has undercut consumer spending as Saudis are forced to spend a greater portion of their income on water, electricity, and gas. New expat levies encouraged 1.6 million foreign workers to leave the kingdom between 2017 and 2018, opening new job opportunities for some Saudi men and women but also creating labor and skills shortages and reducing consumer demand.

The downside of these changes inflicts pain and creates resentment. Suddenly cash-conscious Saudi consumers have cut spending, which amplifies the effect of new taxes on private businesses, which now have to hire more costly and, in many cases, less experienced Saudi workers. Meanwhile, religious conservatives chafe over the entry of women into the labor force, while the burgeoning entertainment industry and the realignment of education with market needs chips away at their influence.

Over time, resentment becomes resistance and, if pushed far enough, revolution. To manage discontent, the government has centralized decision-making and tightened the already restricted political space. This centralization has sped up the time it takes to implement and enforce, as well as amend or rescind, decisions that are not working as intended. For example, when it became clear that subsidy cuts were making it difficult for low-income Saudis to make ends meet, the government quickly introduced a direct payment plan to shield its most vulnerable citizens. Similarly, when the Ministry of Labor and Social Development recognized that there were not enough nationals to fill some jobs, it lowered the “Saudization” rate for those industries from 100 percent to 70 percent.

Tightening the political space has led to some critical, even criminal, mistakes, but it has also helped the government maintain stability in a deeply polarized society during this time of breakneck change and unprecedented upheaval. While Western nations have rightly censured the kingdom for its missteps, they seem to have forgotten just how difficult it is to implement change in their own democratic societies. Just six years ago, the Tea Party movement nearly forced the US government into default for the purpose of causing a repeal of the Affordable Care Act (i.e., “Obamacare”). In 2015, Greek voters toppled their government after it agreed to an IMF-mandated austerity package. And six months after French president Emmanuel Macron rescinded a 5 percent gasoline tax, the gilets jaunes (yellow vests) demonstrations are still disrupting Paris. Were Saudi Arabia to suddenly liberalize politically, enacting the painful changes the country needs to survive the twenty-first century would prove to be simply impossible.

While the government has played and will continue to play a critical role in setting the framework for Vision 2030, the plan’s overreliance on state-driven investment and megaprojects may be misguided. History has shown that ultimate success in any economy will hinge on the private sector. Here, it is important to remember that until Vision 2030, fifty years of state-driven efforts to identify and develop nonpetroleum industries have, with a few notable exceptions, failed to deliver.

To be fair, this phenomenon is hardly unique to the kingdom; most governments have a poor track record of picking industry winners. Consequently, such tasks should be left to Saudi Arabia’s small but internationally seasoned private sector. Throughout its history, the kingdom avoided the waves of destructive populism, socialism, and industry nationalizations that snuffed out so many private sector players in other developing nations. As a result, the Saudi business community has had nearly a century to develop and has also had decades of experience investing overseas, experience that can very easily be redirected toward the domestic economy.

Given this, the government’s wisest strategy would be to simply get out of the way of the private sector. It can do this by simplifying the onerous bureaucratic requirements for businesses operating within the kingdom. In addition, after it has corrected economic and labor market distortions, it should focus on ensuring that the kingdom’s wealth lasts as long as possible by maximizing efficiency in government spending and continuing to eliminate water, energy, and food waste by changing destructive consumer habits encouraged by decades of state subsidies.

History has shown us that states vary in terms of how much economic hardship their populations can tolerate and for how long. And while autocracies may have more tools at their disposal for overcoming resistance, they are not impervious to revolt. Whether Saudi Arabia will ever reach a tipping point remains unclear. The current leadership is the best chance the kingdom has to avoid that outcome. Whether they ultimately succeed is something only time will tell.