#DevTalks: Diversifying from Oil: Aspirations and Results of Saudi Arabia’s Vision 2030

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ziad Daoud Hi everyone, thank you for joining us today. Tim, the Growth Lab, everyone. Thank you for having me. To talk about Saudi Vision 2030. And I think as a result of that time, the sum total of that side of vision, 34 for multiple reasons. One of them is we’re eight years away from the launch of the Vision. So you already have enough data to monitor progress in some places in 2013. So 2024 is more than halfway and good just to assess, again, progress in terms of where Saudi is versus where it wants to be. As you may know, the Middle East is not the most stable or or calm regions. And thinking about Saudi, thinking about the stability of Saudi and the prosperity of Saudi and the successors is something that is important to anyone who is doing their studying or looking or monitoring the Middle East. And I think it’s important also to look at that in the context. And final thing is what happens. This is important for the global economy. It’s important because, you know, money that comes from Saudi and the rest of its neighbors can make or break some IMF deals and some of countries stabilize some countries money that Saudi is a major player in the oil market. So it actually today there was an A-plus decision which was made by the stuff I’m going to be talking about. And it is also it’s not just developing countries or commodity markets or how Saudi investors, its money and the rest of the see how they invest their money matters, even though the biggest economy in the world and the biggest market, the world asset markets. So these reasons you is great for the global growth up to arrange this and I thank them or for having me to discuss this. So what we’re going to be talking about this 20 minutes or so. I’m going to be making three claims. So the claims are the following first. I would claim that subdivision is about many things, but the single thing, single most important target that is important for subdivisions like that, which is the fact that they want to. Reduce the economy’s dependency. So that’s one thing.

The second thing I’ll be getting is I’m going to look at some demonstrator measures and I’m going to argue that Saudi has become more dependent on oil since 2016. And the third thing I’ll be making is I’ll look at the reasons why I’m more than happy to look at the spending that they’re making at the domestic politics in the social context, which is important. And I look at this because they chose to diversify into and how that overlaps with that. These are the same people in the making of 20 Minutes before doing this. I’m going to be you know, I’m going to be not only myself. That’s the implication. Question, but it’s also important to acknowledge that a lot of things are happening in Saudi Arabia since 2016. A lot of them are actually very good, as important to name them. Just before we go to the electrification question. So in name, you know, free samples. The first one is women participation in the regime. This has felt since 2016, in 2016, that female participation in Saudi Arabia was low at less than 80% of the working population. Today, this 36% has nearly doubled in eight years. And that is important not just for the economy, but that’s also important for the general society and the world as you look beyond that. The second big thing to happen in Saudi Arabia is that the government has actually increased its revenues. The oil revenues were $50 billion in 2016. Today, they’re all about under $1 billion in 2020. So revenues have more than doubled. And so that’s something that has to be acknowledged.

And the third thing that we see that happen in Saudi Arabia, many economists looking at this creation of results, we can’t do this. And data has improved significantly in Saudi Arabia since 60. They published more data. It’s broader. It’s more accurate, it’s more tidy. You can bet Saudi Arabia, Mabel neighbor, and see data for that and then the rest. Saudi Arabia is obviously a bigger economy, is a G20 economy. So there is still some way to go towards getting data up to the G20 standards. But you can see that the effort they’re making towards improving indicator and towards making some sense ultimately is it’s useful, especially for me as an economist. I’m sure you’ve got that. So so with that in mind and the result of this vision 2015, it is all a program. So one of the for example, the National Vaccination program has 96 goals. We’re not going about six goals. I think that the central target Vision 2030 is the idea of reducing the economic dependance on. Why do I say this is a point that was launched in 2016 2016 was to get all of us here was Saudi Arabia was was running a very large budget deficit. And it’s clear that the centrality of the idea of that restriction away from oil was front and center to the side target vision. It’s not just the speculate. It’s actually the vision itself or statements from Saudi officials. You can see that. So if you’re going to apply that to upsetting actually, Donald, the vision is a bullet this month. And that paragraph immediately mentions that was taken away from oil is you, as I mentioned, very high value. If you look at the statements when the vision was launched in 2016 or you see this quote from, again, respondents in Egypt is too small. It says, I think. But 2020 also speaks for not so of ambition in that statement.

There’s a lot of ambition inside the vision, but that’s not to account. The point here, this is intended to decouple investment performance from what I know is that’s what happens when a vision is lost. 2016 That hasn’t changed over the years. A recent statement by the finance minister committed to that, and that was in plain fantasy. And he said, Our aim is within the period to 2030 we don’t even look at. So again. Bush said in 2016. And that doesn’t change. The goal of Saudi Vision 2030 is to reduce the economic dependance on oil in Egypt. So if that’s the case, how has Saudi fared towards that goal? And I’m going to show you two measures. Or the first measure is the price of oil. That’s Saudi Arabian budget deficits. So if you think about the Saudi Egypt, the point in time, an all price of $50 per barrel to avoid deficits. And all the time, 81, is it 50 states more dependent on oil that costs? So. I’m going to calculate this number on the basis study publishes quarterly budgetary numbers, accompany that on a quarterly basis. Actually, some recently published their budgets for 2025, so we have the full estimates for 2024. And this is what it looks like. It’s the right one. So what might show us to Saudi Arabia today? This all meets an oil price of $9 per barrel to balance the budget. Now, a few things you can see. First, $93 to avoid deficits is higher than the current market price. The average oil price in the market this year is about 80. Today’s about 70 to 93. Saudi Arabia needs an oil price of $93 per barrel of oil price average $80 per barrel. And the market that means Saudi Arabia is running second.

The second thing you see is that not this is hardly the price that Saudi Arabia needs in 2016 to avoid this, which is not too low. So if you measure dependance by that price, then it has gone up slightly. And the third thing is, is the argument, which is so what is happening is that there is a lot of capital spending not happening just through the central government. What is happening to the sovereign wealth fund is public investment. It. And if you add domestic spending by the Public Investment Fund to the spending by the Minister of Finance and psychiatric, all price that is needed to spending that, so you get the auditing and that is about $108 for that. So you add all of this up, whatever you want to do with the sovereign wealth funds, not Saudi Arabia needs it all, plus $100 today to balance its budget versus 90 something about in 2016. It is higher. That indicates more oil dependance today, which is eight years ago. So that’s one measure of oil. The second measure and this is separately the government budget and we look at imports and exports. So this comes at the price that the whole of Saudi Arabia needs to fund this imports. So if you think about it, there’s money going back to Saudi Arabia to pay for imports. And because you have lots of foreign workers in Saudi Arabia, they send remittances. So these are the outflows from Saudi Arabia. And to offset these outflows with inflows from exports. Some of these exports are oil. Some of them are not. I was surprised that these two flows equal. And that’s what I guess you tell based on the balance of payments data which is published on a quarterly basis. The latest numbers we have out in the June this year alone, number $75 to about. And what you see here, you see that this number is the highest, almost the highest since 2004. This can sound like a massive 2016 or more dependance on oil on oil in Saudi Arabia today. That’s just based on these two sort of measures. And it’s explainable. That stuff is happening in the markets. You see it decided national. So, for example, Saudi Arabia is running a large deficit that is doing a lot of spending for the public investment fund. And also Saudi Arabia has been quite unusual markets this year raising debt. And so the Saudi Arabian sovereign is one of the most suspicious emerging markets. The public investment fund, Shin Bet in financial markets. But they’ve been sold shares in Saudi Aramco this year raising funds. You’ve got fundraising happening in Saudi Arabia. This chart basically explains it.

There’s also, if you think about the news today. So the idea of news that Saudi Arabia needs an oil price somewhere between 75 and $100 for coral either to fund this important deficit. But all of the security in all of society. And what do you do after this until ultimately the gap between the oil price that you need in the price that the market is giving you? You try and restrict supply and all the supply. And that’s what Opec+ did exactly today. Not for the first time. So this was supposed to increase oil supply to the market? Yeah. But you know that if need be, supply prices come down. So and they don’t prices to come down. So what did they do in October? It was supposed to increase all supply. Make it in December. In December. They didn’t do that to January. Did they debate that on January? April. And this these pictures tell you there is there is a price that Saudi Arabia needs for oil and there’s a price that they got between this is what is what is pushing this policy. Who was to step in to hike? Okay. So these are two measures of all kinds. Now, there is a measure of attendance that we should have. And the reason I mention it is because so often you hear that Saudi Arabia or another country in the region, a large share of the economy, most of the economy is not all that is all that, not all growth. The growth of not all this Saudi Arabia, it’s 4 or 5%. And that’s a sign, an indication of diversification or independence for all. They’re not use that much. Why is that? Think about the logic. Saudi Arabia exports oil, and he uses the money from Mexico to build new cities and to build new house and construction will go such as this all activity or as funded by almost all my close up construction activity was whether it was in Saudi Arabia, exports oil money from oil and cars or people. Public sector. Lots of services capped. That’s not what activity. But it’s clearly funded by all money, Microsoft. And this activity is going to slow down. So this is the logic of it. But also empirically, this holds when all prices are low, non-oil growth, which at first time the name suggests is low. So when Oprah when Oprah said 20 or $40 a barrel. You get a lot of growth of 1.6% when oil prices are high above $100 per barrel. You get not oil growth a second between these two numbers. Growth, not all growth rises along with ours. So going use not all the show on oil in GDP as a measure of diversification because not all activities inside the region in general is funded by oil. Okay. So I hope I’ve established a central theme of Saudi vision 2030 is diversification away from all of the convince you that if you look at two measures of devastation or dependance on oil, that Saudi Arabia is more dependent on oil today than it was in 2016 when the vision was launched. People like to and I’m I have a note with what can you just say a few words about why now the vision is or could left and the unknown. What what element is behind that vision? Or, for example, if they understand that the oil would be replaced, I turn out to be energy or.

So the vision was lost by 16 at a time when oil prices went on. Someone with source of supply. And if you saw any country in the region that you don’t want or prices are volatile for whatever reason, sometimes energy transition, sometimes its US shale, sometimes the global recession. And if fuel economy economic performance so coupled with oil prices it is people on the way down. I just got lay. But you get the pain. So this is the idea of that and that experience multiple times. It wasn’t just my experience multiple times and obviously looking ahead and that, you know, the challenge of energy transition and the move towards renewables is may or may not impact oil prices. It’s definitely. Not know. Okay. So Saudi Arabia wants to diversify away from oil. If you look at its measures, diversification, it doesn’t show. Sure, Saudi is more dependent on oil than 2016. Why has that happened? I’ll give you three reasons. The first one is that Saudi has been spending a lot post-pandemic. Remember, all revenues have more than doubled since 2016. Well, spending is up. It’s not already so basically increased on oil revenues by set amount. Spending has increased by more. So on that, not only does it have to as it need to fund the old spending, but also the new gap between spending. And this has contributed to the increase in the price of oil that Saudi Arabia needs to balance its budget when the government spends well, part of the spending is on domestic. Some of the stuff is on imports. And as you increase your spending, imports go up and the price of oil that you need to fund also goes. Now, one of the themes of this year has been that Saudi Arabia has realized this oil market is moving downwards, whereas this I mean, I saw images this year that Saudi Arabia is revisiting projects and saying, okay, this is a project project that’s going to continue this into this projects. But then all this project is do what doing of doing it slowly. These projects are beginning. So they’re trying to rationalize this. But it’s also important to note so this like the past and the present. But let’s look into the future. Saudi Arabia has major global events coming up. They become over the coming decade. Saudi Arabia is hosting the 2027 Asian football. Saudi Arabia is hosting the 2029 Asian Winter Cup’s in Neom, the futuristic city of Notes. And there will be a ski resort neon, and that requires some construction. Saudi Arabia is hosting the Expo 2030 and it is likely it hasn’t decided. The only candidate it will like to host the World Cup in 2034. A lot of events. It’s not the only country in the region that has done this. Other countries have done it. For example, other hosting the World Cup in 2022. So we can learn from Saudi Arabia in this instance. What is the other two things? One other was only to help an audience. And the Egypt issue too, is just part of the pitch. Those two things. One, hosting these events is. The other spent somewhere between 200 and $300 million in the build up to the outcome, all of it in the stadiums, obviously for the event of the new airport or the new network. You Metro not just for the World Cup’s been used before and after, but in the build up to the World Cup. Other economies must follow the Saudi’s two the billion dollar us and we’re talking about more than $1 trillion for Saudi Arabia’s economy. And eventually we can read the reports.

These are the numbers that people spoke about in terms of the pipeline of projects coming in and Saudi Arabia. So that’s a classic story of a building not stop its cost. Or a second lesson from other is that you may end up with access to us. So at a time when the whole JCC is booming, when real estate prices are going to close and are increasing gradually and real, and Saudi or real estate prices are actually stagnating. Falling. Housing inflation that is negative versus empty sentence savvy 70s of problems. So you do a lot of spending and there is a risk you might end up with assets. Doesn’t give you a ton, but they end up big that. So it doesn’t mean that Saudi Arabia will do exactly the same thing, but it still of risk. And hopefully you will learn from the experience of other that face understanding and doesn’t end up with success. So that’s the first reason why you had why you had basically Saudis wanted to do then was in crisis. The second reason is now the reasons why Saudi Arabia’s spending increased wasn’t just because they decided to spend on sports and think hosting global events. There is a strong push after that. Get Saudi Arabia to spend more aggressively. And this is the domestic politics. You see, also doesn’t just create an economy, just creates a social contract, both in Saudi Arabia and the region and Saudi Arabia. This is social contract. Is it something that will provide an alternative since the citizens will provide benefits to, let’s call happiness, an absolute one? And that social contract process is going to become, I would say, some implicit pressure on the government to increase. And again, this is not just Saudi Arabia as the whole beach. Oil doesn’t just create an economic system. It creates social context and creates political institutions questions. It’s political institutions are created by oil. Do they create a conducive for long term growth or not? Well, luckily, we have to help us win this decision. Mr. Ellis, what kind of political institutions waited for long term growth? They gave us the framework. So Ajimobi and others in Clovis nations felt that for long term economic development needed. First, you should satisfy two conditions. One, they need to be pluralistic. So at the end I relates to our society. And two, they need to be stable to protect property rights and to enforce the rule of law. How does the region fare? So this is my dissertation which Robinson as you go write to become more democratic, as you go up, you become more stable. So I’m going to suppose one of these finishes is basically stable, pluralist. So be and you can see most of the region actually. So the net, so most of them don’t have that to this reason that that is that are rents whether it comes from all other stuff covering this whole region but mostly the resources of Saudi Arabia.

So the political institutions that upgraded model. Are not conducive for long term growth. And you could see in multiple states in the country business spending and spending. You see the productivity on which are not so high. It was obvious by the International Labor Organization or by the IMF. I do. No matter how you slice it or the numbers are not great in the region. And this is one of the reasons why this is the case. Questions. Are there any plans to change? Yeah. So while there is I think there is a genuine or desire in Saudi Arabia to diversify away from absolutely obvious for the reasons that was mentioned that come through multiple, you know, all cycles, seeing what declining oil prices does. And they don’t do that again. They wanted to spoil it and will be going to change that. The fact that the political system is stable but lacking in plurality. So that’s why they are looking for is this stuff like oil. That’s why they are looking for mining of metals and they’re looking for renewables and they’re beefing up the sovereign wealth fund, giving them to turn that the stock clearly gets a lot of goes mainly to the government and doesn’t require much labor. So I mentioned two reasons why, you know, somebody has managed to as has increases dependance on oil rather than instead on of the spending. The second one is, is the political sort of institution. The last thing that you mentioned against. Or whole region. The whole of the six countries have gone for six months, so there’s 5 or 6 centers in the region. Everyone’s going everyone wants to be a financial everyone wants to be a destination for tourism. Everyone wants to move up the value chain towards that. So chemicals and stuff. All in all, it all comes along, mostly logistics and e-commerce and then technology center. And you know, if you think about it, it makes sense. So what happens to these countries? We consult with consultants. You know, it’s very similar. I do get the same answer, but the question is how many financial centers the City of Cooperation Council meets. I do have one in Dubai. That was one of them that has tried to be one really strong. To be one to should we mean 4 or 5 in a small sort of geography within the same almost similar time zone. I don’t know how many mega airports the region you may have two great data lines, maybe three. You really need more. I don’t know how many medical Dubai in Oman, in Saudi during treatment or if ports are done.

So this is the third reason. Instead of getting integration, you’re getting so everyone is trying to get into the same set. And what that creates regional competition. So you get something like Inside United since last year, it has impossible. But if you want to get contracts with the government, you need to have your regional headquarters in Saudi Arabia. This is exactly because everyone’s trying to move into the century, you know. So are spending social contract and regional competition are the reason why Saudi are more and today than 2011 2016. I’ll just summarize our concludes. I think the summary what I said is basically three numbers one, two and three. Think one, there is this one fundamental Gulf of Saudi Vision 2030, which is basically to reduce dependance on oil. There are two measures for oil dependance on both the southeast of more oil dependance and less. Over the last eight years. Now three reasons why that happened. Outstanding political institutions and regional cohesion. Now, to conclude this stop me. All prices come down tomorrow. We should drive those values out to it. I think one thing that you have seen in the region is you see the subtle agility in innovation. There is sort of this realization that is political constraints. And the region has been absolutely Saudi and the rest of the BRICs hasn’t actually good out at survival and at times of economic prosperity within these political constraints. So, for example, you look at Saudi and they realize that oil prices have come down. They need to build up a sovereign wealth fund. They’re getting most of the oil exports and so forth. I spent one zero. You look at, for example, a country like Bahrain when oil revenue started to come down. This stuff is becoming more land and generating more land and more income out of the clip and supplementation. In a country like Egypt, when you know it’s gas, you’re starting to stop it to dry up. And the Suez Canal started to lose revenue. They started selling land to foreigners and that helped them get over a crisis. So within the political constraints that imposed on the region, they impose themselves. I think they’ve been quite creative in generating new sources of revenue that gives them economic survival while maintaining the sort of political system. And I’ll stop here. Thank you very much for this.

Tim Cheston What? But I will share some reflections from some of our work that we have done with the Ministry of Economy and Planning in Saudi Arabia for the past year, since 2016. And then we will get into a Q&A. So I will keep this very brief. And I think it really highlights that this is not a conversation that the region is privileged to have. How do we define what we mean by the world economy, how it pertains to, but also in terms of the army? And I think that thinking about how we measure these problems is a major, not just a talking point, is a major need for the region and how we think about that. And it was a while ago, as a matter of fact, to score points of what it means to have an oil economy. It’s not just about the sectors and government spending, how it seeps into your form of the immigration system and how it seeps into all different areas of policy that what you’re trying to diversify away from oil complicates a picture even further, as was highlighted today. So this is perfectly aligned with what you just showed. Now, we need to be understanding what is the fundamental driver of the economy that the Saudi economy does not have many drivers of growth. It largely has had a and is also part of the challenge for Vision 2030 is that it’s not being driven by quantities of oil. If you actually measure the quantity of oil exports per capita out of Saudi Arabia now exports 60% of its peak in 1991. So oil quantities are not going to be a driver of growth in the medium term. So you have to therefore rely on oil prices.

We all know the challenge of oil prices as that as a fundamental factor of your economic growth itself. So then when we think of how oil seems to sway into that oil economy, very clear that the main driver of the non-oil economy, as shown here, is the level of net government expenditures, the very, very close correlation between the level of government spending or your fiscal impulse and the size of your non-oil. So again, this is how oil finally sits its way into the non-oil left, as was perfectly highlighted. We don’t have a system in which you have multiple drivers of growth and you actually have one central driver of growth and that is the level of your risk level. So that means very two very different effects. One is during periods of oil, high oil prices, as we saw from 2014 to 2011, you didn’t get a large level of government spending. That then allows the what we call the non-tradable sectors. This is your construction, your retail. This is the majority of the private sector in Saudi Arabia hits boom times as well, and they’re able to grow nicely. What happens during times of fiscal action? On the right side there, you see that as the government pulls back its spending, it is the non-tradable sector that also takes a bigger hit. And the only source of growth is your non-oil tradable sector. I would pose to you the challenge that Saudi Arabia faces in the medium term is that we are going to be observing in the right side picture of fiscal contraction, not in a picture of fiscal expansion. I despite the attempts to continue that fiscal spigot in the short term in the past couple of years. So in this context of fiscal contraction, the reason we need to focus on oil diversification is that that is going to be the only driver of growth and it is going to be much harder times for the non-tradable sectors of construction and retail. When the fiscal impulse is negative, as we expect it to be. So this this is further proof that we have not planned this presentation together. Because this is precisely the spy that sends Professor Ricardo House race, the last country to spend far beyond your means or just be spending at a consolidated rate of $112 when oil is at 80 is Venezuela. And we all unfortunately know how Ricardo has suffered watching Venezuela be half the size of the economy that it used to be. So this should be sending warning signals out there. And we need to carefully look at a consolidated public sector perspective. And that’s precisely a perspective that has been very hard to measure in the past, but one that can guide better actions and better policies moving forward. So I suppose my sense, if I had to summarize Vision 2030, I think it’s the right solution of diversification. But to an undefined problem. Why is diversification not required?

So again, if we have to define it, is because oil cannot be a fundamental driver of growth in the medium term. Quantities are falling per capita prices is not the way you grow an economy. And so, you know what then? How has Vision 2030 evolved? Well, initially there was a major push to say we want to focus on 2030 diversification. They had to confront the falling fiscal revenues that oil prices have fallen. And they needed to immediately turn the lens for a new priority. And that was fiscal balance. So the government came up with a fiscal balanced plan. One point I want to point out and quickly decided we need to put the brakes on spending and we need to restore fiscal balance as priority number one. This was around 2017, 2018. This became a priority for government. As you pull back your government spending, what happens to the non-oil economy? We had a recession. So what does the government then say? We restore short term growth. And as in the middle of all of this picture, we realize there’s a lot of short term stimulus spending is not achieving some of the 2030 diversification. So now we need to do Vision 20, 32.0 and create some of the new mega giga projects that are there as well. And then finally, throughout all of this picture is the challenge of certification that 83% of the private sector was is ex-patriot labor and labor. And how can we explain in a system with excess demand for labor the fact that we have Saudi unemployment? So the government put in many direct efforts to try to increase the rate of Saudis. And I think one of the fundamental challenges in Saudi today is the lack of recognition that these are competing objectives and they’re trying to achieve. One actually makes some of the other objectives more difficult. But the one objective here that actually is pointing in the right direction is the approach to diversification, that if you are able to achieve the most protection is more likely you would achieve higher association with achieve new sources to improve the fiscal balance and to stimulate growth. If you push heavy on sanitization, it is not obvious that you will achieve further diversification.

The Saudi workforce is a higher wage sector. So you’re posing a higher cost to your private sector that is not obvious that you’re opening more opportunities for diversification in that direction. And these are sort of the conflicting ways in which all of these positive objectives might actually come into competing goals, goals moving forward. The final tip that we want to share is how we get to growth. That think about what we call the product space or this kind of map of technological similarities, which we map all of the different products produced in the world. And then you see that those two products that are close together are often co-produced in the same locations. So we see textiles in the bottom right there. If you in shirts, the vice often knows how to proceed as Christians, but very far away from that is automotives in the sector. And so left electronics, so very few places that produce apparel also produce electronics. And then there are the eyes of the world. In the top middle, there is oil. So what that means is that very few places that produce spoil also produce some of the chemical sectors. Very few places that produce oil also produce plastics because the cost of labor, a regime that produces plastics in Bangladesh and Saudi Arabia, is that difference is higher than the cost of shipping oil from Saudi Arabia to Bangladesh. So what we learn by looking at this through a product lens perspective is that the lack of diversification also presents challenges in terms of how easy it is for you to take the know how you have today and to enter new opportunities at the low diversification and the fact that few industries require the same knowhow as digging a hole and and trying to find oil also complicates the challenges of what sectors will be easy for you to jump and used to know how you have to move into those sectors. So we also want to be thinking beyond the macro fiscal of this investment side. What is the challenge of coordinating diversification? Also sees a challenge on the on the House side of the equation as well. So those are a few reflections. And now we’ll have an open Q&A. We have some some nice questions from Zoom as well. And we will continue.

Guest Thank you Tim and Ziad, I really appreciate your valuable insights, especially the growth of complexity theory, which we are learning in the 130. I didn’t get quite I didn’t quite get why we’re disregarding the non-oil growth. As you know, it is a measure of economic diversification. So why should we care if the sovereign wealth fund is funded by oil or something else? Isn’t this a tool for economic diversification, as we’ve seen in Norway and other oil dependent countries that went through economic diversification to some degree? If we’re converting oil wells to infrastructure projects and, you know, other economic engines, that in the hope that we would steer away from oil, isn’t that economic diversification. So if you can think of it through why you think that this oil has become even more dependent on Saudi Arabia.

Ziad So the fundamental reason is that a lot of these sectors are funded by all money. All money trumps all prices from the these activities talk. So for. Construction was able to become self-funded on the date at the moment and construction sector is deck for the moment and all. But obviously that’s going to be a question of currency as we think that all the sectors in Saudi Arabia are heavily told. When oil prices are low, it gets easier and more robust. So high the high growth business.

Guest We naturally see. But I think that the projects after they materialize, that that’s that’s the road of this. Can either reciprocation.

Ziad In my mind or thinking about the future and things as they are now and as things stand. These sectors are linked to oil prices. Maybe in the future, this relationship will change. I’m monitoring this as as it no doubt has a tradable versus non-tradable that I think is. I spent years with ministers trying to sit down and just translate this concept. So it’s not oil. Not oil. It’s trade. All non-tradable debt at the supermarket. Saudi Arabia has to look at their access to customers. If you are shipping and if you are shipping in air conditioners, you can make those air conditioners anywhere and ship them to customers in Saudi Arabia. So these two sectors are going to depend on different sources of what we call aggregate demand, right? One is dependent on the level of domestic purchases for supermarkets, and a different one is a global demand for air conditioners. So if you start imposing higher Saudis issued restrictions, the non-tradable sectors will set off directly to consumers. But that air conditioner cannot pass up to consumers because it depends on global demand and global prices for air conditioners. They will either relocate or shut down operations or prices become too high. So this concept of how we think about different policies and how they affect different sectors, you need to narrow the lens to understand that those ideas start with all these sectors, like inside growth is growth that comes from global demand. And that is what we called an on the level tradable tradable sector. And that sector is very sensitive to policies and that sector is not necessarily the end goal of many of the current spending under certification type. So we think we can even think of tourism finance and those are still tradable services, but narrowing the lens to realize that construction is not one of those sectors and that right now the majority of employment in Saudi Arabia is in these non-tradable services means that will increasingly come into tension between the economy of the past and keeping that alive, which was a tension in 2019, 2019, the construction sector had gone through 16 consecutive sectors of negative growth because it’s so dependent on domestic spending, and domestic spending was negative during that period. So there are multiple sources of demand for the construction sector that is highly dependent on the fiscal impulse. We need to be thinking about diversification into the sectors that actually depend on global demand and have a natural continuing economic growth. And we want to take these questions and focus on.

Guest I love planet Earth, but I’m going to play the devil’s advocate for two minutes. I sometimes see policy practitioners falling into this trap of falling in love with the solution to diversification and then trying to apply it in every context. I think one key difference between economies in the Middle East and Venezuela, or even the economies and ajimobi use both is that the budget constraints of these countries don’t bind. They are wealthy. And so maybe a way to think about this would be to go along a different road us to think about how to take those oil revenues and invest them for the future, to invest them for the kind of development that Saudi wants to bring about, rather than trying to find new industries to develop from scratch right now. The example that comes to mind is something like Norway, where they put their oil reserves to a varying stream of users and industries. So what are your thoughts on taking that approach at all?

Tim Cheston Let’s take a couple of questions…

Guest So thank you very much for the talk. I really like this tradable non-tradable distinction, which I thought was very helpful for me to think about. My question is on the like kind of the sectors that are in that gray zone where oil derived non oil tradable. This one is very easy for Saudis to expand into because they kind of have a competitive advantage. But on the other hand, it’s ultimately dependent on oil. And then there’s other ones that might. Non-oil derived non-oil trade was the can. That’s very like Saudi might not have competitive advantages, but that can really truly diversify self away from all sectors. So even these two types of non-oil tradable sectors, where do you think they should focus on?

Guest And my questions brief I’m just curious if there’s a mega-project that you’re looking at right now that is a model maybe within trade in goods sector, something that you think is long term and sustainable, that maybe future planning administrations can think about replicating projects like that. That’s already up right now.

Ziad Because a couple of points, I think you mentioned that the budget constraints is not binding. I’ve been restricted on that, those constraints to 1%. And in 2016, Saudi Arabia’s planning a bunch of X in excess of 10% of GDP as $3 billion of cash today, Saudi Arabia in 2024. That’s one of the largest issues in emerging markets of the Atlantic. I think just talking about the two, two, one, two. And if you think about the old ones, just tells you a budget constraint was not binding, they would not be an option. You’ll be just watching from watching the all night set of increasing production and losing out to other competitors and don’t have to compare it to secondary education examples. Most of you don’t see the budget constraints on boards in 2021 and 2020. The kinds of same ideas that might give them a budget constraints clue came out. And if you look at the public debt ratios in the region, you saw a rise practically after 2014. Then there’s the question in terms of other projects, I just think in terms of projects and sectors, let’s think in terms of what what dimension. You know, let’s look at the environment and let’s look at the shutdown. And yes, I think the fundamental reason, which is also linked to the other question of the reason why the region does not export all exporters in the region, anxiety is not export non oil products as they don’t have two contracts with each other. But just in terms of the cost. I think the cost in the region, if you get this chart back in 2019, when you look at productivity and you just have wages and wages are too high and wages are too high, costs are too high and your costs are too high until the price is too high and your underemployment and in these trade centers. What is the solution? I think, again, you have to do it within the constraints of local population employment, but also you need to diversify away from oil. One proposal is basically to provide you to but to distribute all of one universal to all cities that basically and then you don’t stop doing public sector jobs that will bring the wage premium and the economy down, and that will lower the cost of production without impacting the wellbeing of individuals because they get the income that they get from their jobs isn’t what the other income they get can have additional income from their personal income. But as popular solutions and calls and people can criticize or adopt, we have a measurement of GDP or they just we have some questions we do want to get through.

Tim Cheston But I just want to reflect on this very nice point about what truly is not oil in the context of an oil producer. I think you’re spot on in saying Saudi Arabia risks getting into what we call a misreading, both if the actual export value of that chemical is less than the oil subsidy that goes into the chemical itself. So there’s been many efforts towards energy price reform in the country that would actually we would say we don’t actually know the competitiveness of the chemical sector today because we haven’t been able to tease out the oil contribution or subsidy contribution to those sectors. And Sabic continues to remain basic chemicals, which are often some of those dynamics. And the correlation with oil prices is strong in those sectors themselves. But but there are chemical laboratories in which trained scientists are there whose value added more oil component there. So it is by no means a one off and it is that exact perspective to share, which is how we differentiate between our oil contribution and the know how we’re buying contributions as the key players there. I think the megaprojects, you know, again, we would take that tradable on trade. Well, let me say that focusing on tourism and having fewer Saudi tourists go abroad and keeping vacations low will offer some potential to increase that sector. That sector is much larger globally than it has been in Saudi Arabia, with the exception of Libya. And there is significant potential to be increased to its own. There is that potential linking it? Absolutely not. So that this dynamic of not looking at tourism as a construction project, looking as a service based industry is a bit muddled in some of the current plans of some of those projects. And then there are some factoring zones and cities that have been planned that if diversification is to succeed, it will require a well-coordinated strategy towards entering these new sectors that we can have more hope in that space as well. Yes, please, let’s take some Zoom questions.

Yomna To the questions on Zoom, I’ll give you three questions. You know, this question was given the fiscal dynamics and social contract constraints, you explain how do you think investors in the capital market are taking this pressure into assessing Saudi Sovereign risk if they are taking them? For Tim, how do you think Saudi can measure the trade off between Saudiazation and diversification and then for both of you and the visual effects and not going great, it’s easy to criticize, but how can it work? What should Saudi do?

Ziad Right? So in terms of the risk from investors, I think the main the main can be looked at is the price of oil. And essentially our price of oil is high. These risks are limited. Oil prices drop. Sometimes people start to begin to budget deficit and we start looking at the future and the growth and so on. And so far, I think so much or so the sovereign risk is it’s fiscal crisis. In terms of the last question, which I cannot remember…

Yomna What can they do differently?

Ziad What can they do differently? So I think, again, I stop people because I want this to succeed. I once had iTunes, but I think it’s useful to do this analysis midway because I think you have a fundamental constraint. If you really want to diversify, you have to do something about productivity is to lower wages up to high. That to the productivity and it shows up in multiples and it shows an openness. And honestly. I still keep on thinking how going convince them. I need to bring it back. You need to bring the gap between productivity and wages closer to that, either by increasing productivity or you can do that by lowering rates. But again, that’s not the technical solution that requires thinking about the general communications with this. And that’s why it is slightly more difficult than increasing the intellect or, you know, things.

Tim Cheston And let me reflect on the Saudiazation versus the diversification question. So there you know, we think there’s different ways of measuring lines, right? And a lot of us say, no, the intensity of light is this light on. How bright is it? And what we’re trying to encourage is thinking of a spectrum of light. A light comes in very different, different colors that we actually think about this spectrum in terms of stylization right now, a lot of studies and policy assumes that there’s two inputs Saudi and X and says, okay, we have too many experts in this sector. We need to look more Saudis and assumes fundamentally the policies that they are substitutes. And what we have found is that expat workers and Saudi workers exist in different sectors, have different skill sets and have very little evidence of Saudi ready ability for Saudi workers to be able to substitute expat workers. So the growth that we think is in terms of that spectrum of right is that actually the alphabet has 26 different letters. And if you think of the world as a game of Scrabble in which you have all of these different areas or capabilities or knowhow that you have engineers is different than your employer is different than your dentist, and you’re actually able to understand the words that you’re able to produce using all of the different knowhow in different heads. And then we begin to say, you know, how, you know, essentially if you have an anesthesiologist without a surgeon is about as good as me, I can help put you to sleep. But I can’t operate that that operation. And so as we think about the world that way, you should be in an ideal labor market where if you don’t have a Saudi surgeon, you can simply replace that with an actor, which will not get to that policy. And to solve that Saudi surgeon to a policy that assumes that you can simply substitute that worker with a Saudi in the short run so that the focus of policy is not achieving. Is that constraints of diversification because it restricts your ability to solve for the missing letters in order to create more complex words in that location. So taking away from simply the intensity of life or how many calories and taking up the world in terms of we need different skill sets to be here and experts will play a significant role in trying to achieve higher wages and higher goals for Saudis. And how do we maximize complex industries we can be competitive in by bringing in that talent from abroad would be a different way of thinking of it. And I think something deserves credit for reforming the system and some of the other immigration systems and move precisely in this direction. And we think that there’s more that can be done in this space. We are overtime. Well, happy to stay and answer any additional questions, but very much thank everyone for joining, for Yomna for coordinating, for Ziad and for this very interesting talk that we should be having more at this hour around Harvard and around the world. Thank you.