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The ‘Saudi disease’ and its cure

Mazen al-Sudairi

Published: Updated:

First of all, what exactly is the “Saudi disease?” And how is it different from the Dutch disease? The Dutch disease is a concept that describes the depression and decline of Dutch industries unrelated to natural resources after the advent of natural gas and the currency appreciation - the Dutch guilder at the time - which undercut the competitiveness of other Dutch exports.

The “Saudi disease” is different. Oil was behind the growth of the Saudi economy and the emergence of various large and diverse industries and the building of foreign reserves. But the problem is that oil remained the lifeblood of Saudi economy due to its significant impact on government revenues and exports, in the same way gas emerged in the Netherlands after the development of the Dutch economy, adversely affecting it.

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As for the Kingdom, oil first came into the picture to build an economic and monetary base, but it proved difficult to break free from, making the “Saudi disease” different and complex.

The cure for this disease lies in two steps. First, regulating the pivotal oil markets. In his first interview with The Economist in 2015, His Royal Highness, the Crown Prince, emphasized the diversity of Saudi economy and sources of revenue. A few months later, there was a notable change in oil policy.

Saudi Arabia's Crown Prince Mohammed bin Salman in Jeddah, Saudi Arabia, September 18, 2019. (File photo: Reuters)
Saudi Arabia's Crown Prince Mohammed bin Salman in Jeddah, Saudi Arabia, September 18, 2019. (File photo: Reuters)

The previous trend was to weaken high-cost producers such as shale oil, which would have collapsed, had it not been for the relatively low-cost producer Permian Field. In addition to gathering more countries under the OPEC umbrella in the form of OPEC plus, including Russia.

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At the Algiers meeting, agreement was reached, and the market was re-regulated. Prices gradually started going up, and the survival of shale oil proved to grant strategic stability to the oil industry and made the US pay more attention to it. This was demonstrated by the commencement of Saudi-American coordination efforts to reorganize the market last April.

The second step: Economic diversification. There are difficulties that cannot be ignored. A 2013 study showed that each riyal spent by the government is only reflected as 0.6 riyals on domestic output - which shows spending inefficiency, and a corruption red flag. This is in addition to the volume of the shadow economy and lack of data, which called for structural and broad cultural, social and systemic reforms that heavily contributed to opening up the mining industry and the increasing the ability to tackle corruption.

Structural reform is much more important than the unhealthy high growth rates of a distorted environment. For example, the workforce improved on a quality over quantity basis, as it witnessed improvement in terms of age and skills, not numbers. Female participation also increased to 31 percent. The government was able to gather more societal data thanks to the Citizen’s Account Program, and private sector data, particularly companies data, through the expat fees and taxes applied in 2018, which helped the government estimate the pandemic stimulus package and pay the employee salaries of small businesses.

The non-oil economy witnessed the emergence of many service sectors such as entertainment, quality education, cultural activities, and others, causing the shadow economy to recede, especially under the digital environment.

Saudi people watch the concert for composer Yanni during the concert at Princess Nourah bint Abdulrahman University in Riyadh on December 3, 2017. (Reuters)
Saudi people watch the concert for composer Yanni during the concert at Princess Nourah bint Abdulrahman University in Riyadh on December 3, 2017. (Reuters)

Finally, tackling the “Saudi disease” requires taking oil markets into account and monitoring and protecting the oil industry from any injustice that might befall it, combined with promoting diversity and growth after achieving structural reform, which should only be a matter of time. Although the hardest part is behind us, the challenges are endless.

The Crown Prince is betting on us, his citizens, his family and brothers and sisters to stand united against this disease, which the world will one day perceive as the “Saudi miracle,” granting us the respect we deserve for being the generation that achieved it.

This article was originally published in, and translated from, Saudi newspaper al-Riyadh.

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