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Saudi Arabia’s Prospects to Diversify Its Economy Essay

In a world where economies go digital, and development strategies are knowledge-based, it is time for Saudi Arabia to make a power move. Saudi Arabia’s Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud has the second most influential position in the country and has already put forward several ambitious project blueprints. Some of his ideas, and namely, modernization and diversification of the economy, won him public appraisal.

Some, however, were met with apprehension and criticism, for instance, his intention to offer Aramco’s shares to foreign investors. The essay will provide a brief historical overview, explain the need for a change, outline the country’s position in the context of post-colonialism and international relations, and offer solutions.

Saudi Arabia’s Economy: An Overview

As of now the economy of Saudi Arabia is part of the top twenty economies of the world (G20) (Wynbrandt 2014). The Middle Eastern country has come a long way to achieve such outstanding results. Up until the early 1930s, Saudi Arabia was a subsistence economy characterized by self-reliance and self-provision by the community. The decade has proven to be a game-changer for the entire nation: after an unsuccessful attempt at a concession to a British oil company in 1923, in 1933, the country signed an agreement with a California-based Standard Oil. Oil was discovered as early as 1938; however, World War II curtailed all operations.

It was not up until 1945 that the country saw the first refinery that triggered a massive expansion of the oil industry (Wynbrandt 2014). A close, fruitful collaboration between Saudi Arabia and the United States led to the discovery of the first offshore field in the Middle East. Thanks to the efforts of the Arabian-American Oil Company (Aramco), Saudi oil production rose exponentially and allowed for exporting the product to the other countries in the Persian Gulf and the Mediterranean.

These events attracted large numbers of Arab and non-Arab migrants to the kingdom. Easily deportable and often living off low wages, they invaded the workforce but were unable to settle down, which made them an unreliable resource for the Saudi economy.

All in all, the growth of the petroleum industry shaped the future outlook of the country’s economy for the decades to come. In 1961, Saudi Arabia became one of the founding members of the newly founded OPEC. The 1973 oil crisis benefitted the country’s economy as the price of oil skyrocketed from $3 per barrel to almost $12. This was followed by a rapid increase in GDP from $15 billion in 1973 to $184 billion in 1981 (Wynbrandt 2014).

Despite the inarguable success, the Saudi government grew weary of the foreign presence and leverage, and by 1980, after a gradual purchase of the assets, Aramco had been nationalized. In 1997, the volatility of the oil market became apparent again: due to a variety of political and economic factors, the demand was on the decline. Two years later, Saudi Arabia governed a campaign with OPEC and other oil-producing countries, negotiating higher prices (Wynbrandt 2014). The events of the 20th century taught the country a lesson: oil dependency presents short-term benefits and long-term issues due to the overall faulty nature of the resource-based economy.

The Weaknesses of the Resource-Driven Economy

While the development of the oil petroleum sector once ensured Saudi Arabia’s wealth, in the 21st century, the country is likely to confront some of the common issues related to reliance on natural resources. First, as of now, the oil and gas industry faces unprecedented difficulties due to political and macroeconomic reasons. Oil price volatility has always been a troublemaker; however, the decade to come is bound to present unique challenges (Samargandi, Fidrmuc & Ghosh 2014).

According to the most optimistic predictions, the prices will remain at their current level with a fairly little space to grow, thus, not generating new development opportunities for oil-producing countries.

Further, traditionally the oil sector is a major employer in oil-producing countries. It does not only hire but also ‘grows’ specialists to serve its needs from the early days, recruiting talented university students. For all the advantages of a secured workplace and a lucrative occupation, reliance on a single industry narrows down options for young people and discourages them from branching out. The situation might prove to be problematic for both the state and the citizens.

While the domestic job market is losing out on the diversity of specializations, oil, and gas experts’ future might be jeopardized were another crisis occur (Samargandi, Fidrmuc & Ghosh 2014). Lastly, the prevalence of the oil sector over all others allows for the accumulation of power in the hands of elites. Those who gain access to coordinating wells and refineries gain leverage and might be tempted to abuse it to perpetuate their political interests.

The Need for Adaptation

Now that the general disadvantages of oil dependency are outlined, it is critical to put the issue in the context of Saudi Arabia. In 2016, the Saudi authorities, the Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud included, published a document titled Saudi Arabia Vision 2030.

A blueprint for the next fifteen years addressed the country’s economic issues and outlined a path to long-term growth and prosperity. Among the guidelines for the future, the Council of Economic and Development Affairs (CEDA) listed support of the private sector, advanced capital market development, and financial planning promotion (Financial sector development program 2016). All these three pillars serve one greater purpose, the diversification of the Saudi economy.

A skeptical mind might point out that the Saudi economic strategy 2030 as is put forward very few original ideas if compared to the world’s developed countries. Still, Saudi Arabia might be on the way to be a catalyst for a sweeping change for the entire region as the proclaimed goals have never been set by any other oil-producing country. The country’s current growth model has been discussed for many decades and now found support from such organizations as the World Bank and International Monetary Fund.

The rationale behind Saudi Arabia Vision 2030 and its relation to the end of oil dependency is exhaustively clear. First, the strategy emphasizes the importance of creating a vibrant job market. It is argued that as of now, the country’s public sector is bloated and oversaturated whereas the private sector is underdeveloped and fails to keep up. According to McKinsey’s analysis, if Saudi Arabia wishes to double its GDP and create 6 million more jobs by 2030, it needs to invest an amount of money as great as $4 billion in the non-oil sectors (Nakhle 2016). The following eight industries are to drive the country’s economic development and generate up to 60% of the growth: health care, tourism, retail, finance, mining, manufacturing, petrochemicals, and construction (Nakhle 2016).

Second, the oil industry is not precisely environmentally friendly. From the crude harmful methods of extraction to the finite nature of the resource, oil and gas are not sustainable sources of energy and might be replaced at the first opportunity. In the Anthropocene era characterized by the recognition of the human impact, there is a global trend toward seeking renewable sources that would serve as a ‘green’ alternative to fossil fuel. For instance, according to Herrmann-Pillath (2017), only solar energy is thermodynamically neutral and comes from the most abundant supply available. If the most ambitious ideas come to fruition anytime soon, Saudi Arabia as the world’s largest holder of oil might be left out of the global race with excess reserves.

Saudi Arabia and Postcolonialism

Historically, Saudi Arabia has never been colonized by another nation of European descent. The sole occurrence to date is probably the occupation of Tarout island by the Portuguese; though, the reports on the event are still conflicting (Hanieh 2013). Hence, in terms of colonialism, within the MENA (the Middle East/ North Africa) region, Saudi Arabia was an exception. Whereas countries such as Tunisia struggled to manage resources in a meaningful way after the acquisition of independence, the kingdom never had to undergo a painful and challenging transition to autonomy (Hanieh 2013).

Still, some experts claim that Saudi Arabia is too dependent on the US military and financial instruments. Ever since the 1930s Saudi Arabia has been somewhat constrained by the US leverage and had to play by its rules. The nature of this relationship can be explained by the theoretical framework put forward by Ferguson (2011). In his work ‘Civilization: the west and the rest’, the researcher argues that the West uses six killer apps to assert its dominance: competition, science, private property, medicine, consumption and work ethics.

While all these competitive advantages benefitted the countries of the Northern Hemisphere for centuries, the developing countries have now entered the race as well (Mishra 2011). Interestingly enough, Ferguson (2011) names two civilizations that pose a direct threat to the West – Islamic and Chinese, which makes it compelling to examine the issue in the context of Saudi Arabia.

Saudi Arabia has been a partner of the United States since the 1930s. However, its role had become more significant by the end of the 1970s. Up until then, both the kingdom and Iran had been “the policemen” of the Gulf region appointed by the US. As the Islamic revolution toppled the Iranian government that was in favor of the US, Saudi Arabia remained to be the sole pillar of support in the Middle East (Wright 2019).

Fast forward to the 2010s when both countries have ambitious leaders – Donald Trump and Mohammed bin Salman. They both are known for controversial ideas, ostensibility, and unwillingness to compromise. Trump has already altered the nature of the US-Saudi Arabia relationship: now he only values transactions while dismissing defense cooperation, intelligence-sharing commitments, and oil production (Wright 2019). Thus, the US might now be denied access to its killer apps while taking advantage of what Saudi Arabia has to offer, therefore, slowing down diversification in its ways.

International Financial System

Contemporary capitalism is defined by three key concepts: neoliberalism, globalization, and financialization with the latter, probably, being the most dominant. Financialisation refers to an increased focus on a country’s financial sector as opposed to the others. The phenomenon is the product of its time: as the United States is losing its hegemonic power, other countries play on fuelling their economic growth by inflating the financial sector.

The Gulf Region is not an exception: its ‘material structure of political, economic, and social reproduction are underpinned by financialization’ (Hanieh 2018, p. 9). The new tendencies allowed commodity exports and financial surpluses to gain a competitive advantage and strategic weight (Hanieh 2013). It is argued that akin to reliance on natural resources, dependency on the financial sector presents short-term advantages but might cause problems in the long perspective.

The Saudi economy underwent financialization to a certain extent but is not entirely shaped by this global force. It is difficult to say whether Saudi Arabia will have to subscribe to the international financial system with its focus on debt. Recent research showed that contrary to common belief, the relationship between financialization and economics is not linear but rather has an inverted U-shape. An enlarged financial sector accelerates economic growth to a certain point after which the economy goes into recession (Polychroniou 2017). For Saudi Arabia, a decision to adopt the international model would mean the ‘brain drain’ from other sectors into finances. Further, the adoption would contradict the mission outlined in Saudi Arabia Vision 2030 which capitalizes on diversification.

Platform Capitalism

Platform capitalism is another development model that Saudi Arabia might consider. According to Srnicek (2016), a platform is a monopolistic, knowledge-based enterprise that needs to meet four characteristics. First, it must be an intermediary digital infrastructure that enables human interaction, be it customers, producers, suppliers, advertisers, and others. These platforms further empower their users to build their brands using the means that a given medium has to offer, thus, relying on network effects.

The more users a platform accumulates, the more revenue growth is possible for its founders. Third, in platform capitalism, customers are drawn by the offer of free products and services, which enables constant user engagement – the fourth characteristic.

For Saudi Arabia, platform capitalism presents both opportunities and challenges. On the one hand, this form of the economy accelerates digitalization and fosters the private sector that is in dire need of talented leaders. On the other hand, platform capitalism does not rely on the production of goods which might be unsustainable in the long run. Moreover, the entrance barrier is fairly high due to the monopolization by such companies as Google, Facebook, and Amazon. Saudi Arabia would benefit from choosing the appropriate form of platform capitalism. Within Srnicek’s (2016) classification, the kingdom could focus on developing industrial and product platforms in line with Saudi Arabia Vision 2030.


The kingdom of Saudi Arabia has been blessed with abundant natural resources, which throughout the second half of the last century, has made the country one of the wealthiest nations in the world. Over-reliance on foreign investors, joint companies, and the petroleum industry do not appear sustainable in the long-run. Saudi Arabia Vision 2030, a comprehensive development strategy, points out the need to diversify the economy, and namely, make the job market more vibrant and shift the focus from the oil sector.

The progress that the country has been making up to now, however, can be stifled by the uncertainty in the relationship with the United States. Saudi Arabia needs to make the right choice, be it finding its voice or adopting an existing system that emerged in the Northern Hemisphere. So far, financialization seems to be a short-term solution that will trigger economic growth up until a certain point. The tools offered by platform capitalism might be of more use as long as they are aligned with the country’s vision.

Reference List

Ferguson, N 2011, Civilization: the west and the rest. Penguin, London. . Web.

Hanieh, A 2018, Money, markets, and monarchies: the Gulf cooperation council and the political economy of the contemporary Middle East, Cambridge University Press, Cambridge.

Hanieh, A 2013, Lineages of revolt: issues of contemporary capitalism in the Middle East, Haymarket Books, Chicago.

Herrmann-Pillath, C 2017, Economics of the anthropocene. Principles and consequences for policy design. Web.

Mishra, P 2011, ‘Watch this man’, London Review of Books, vol. 33, no. 21, pp. 10-12.

Nakhle, C 2016, ‘’, Austrian Economics Center. Web.

Polychroniou 2017, ‘Financialisation has turned the global economy into a house of cards: an interview with Gerald Epstein’, Truthout. Web.

Samargandi, N, Fidrmuc, J, & Ghosh, S 2014 ‘Financial development and economic growth in an oil-rich economy: the case of Saudi Arabia’, Economic Modelling, vol. 43, pp.267-278.

Srnicek, N 2016, Platform capitalism, John Wiley and Sons, Hoboken.

Wright, S 2019, ‘’, Al Jazeera. Web.

Wynbrandt, J 2014, A brief history of Saudi Arabia, Infobase Publishing, New York.

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