The new budget of Saudi Arabia is full of fascinating insights for both citizens and foreign investors, including an update on the rich range of Vision 2030-related projects under implementation. A shrinking budget deficit and robust non-oil growth together engender optimism, but the budget also is a reminder of how hard it is to create private sector jobs after decades of public sector dependence.
Saudi Arabia’s unemployment rate has fallen in recent months, from 12.7 per cent in 2018 to 12.3 percent in the middle of 2019. The government has a clear priority to reduce unemployment further, and the budget points to various challenges policymakers face.
In particular, the government’s expatriate worker levy—a fee incurred by companies employing migrant workers—has been a double-edged sword, rather than the win-win many policymakers and citizens expected. The presumption was that it would create non-oil revenues for the government, while also encouraging the private sector to employ Saudi citizens. Yet progress on this latter goal has been limited for three reasons.
First, Saudi citizens are imperfect substitutes for foreign workers: in addition to demanding higher wages, many also have skills poorly tailored to the private sector’s needs, and employers regularly complain of low productivity. Consequently, when the price of an expatriate worker rises, an employer often prefers to decrease their level of output rather than hire a national, as the required wage is too high.
Second, years of low-cost foreign labor and plentiful government contracts have generated a private sector with a very narrow and inefficient business model: combining migrant workers with imported goods to sell final products locally. These businesses do not know how to innovate or add value beyond gathering low-cost inputs, and there is no place for high productivity Saudis in such organizations.
Third, Saudi businesses that do create jobs for nationals but are downstream of the ones that depend upon low-cost expatriates, also suffer from levies.
Thus, Saudis have come to realize that creating jobs for nationals is much more difficult than simply restricting jobs for expatriates.
Several items in the budget reflect this reality. The government has declared that it will bear the cost of the expat levy for five years in companies operating under industrial licenses, in an effort to give businesses more time to adjust their business models. Moreover, expenditure on public sector employees has increased by 4.2 percent in one year. This is the result of an aggressive push to replace expatriates in the public sector with nationals, which necessitates paying higher wages.
Beyond the levy, the budget also confirms the difficulties of creating jobs for Saudis by directly developing their labor market capabilities. Among the long and diverse list of programs reported in the budget, there is a dearth of projects that seek to either increase Saudi nationals’ productivity, or that form them into better entrepreneurs. And where they do appear, such as the establishment of institutes and training centers, their progress is described in terms of the expenditure, rather than a more direct measure of their effectiveness.
The majority of labor market assistance comes in the form of wide-ranging infrastructure development designed to make operating a business more straightforward. However, while such improvements are welcome, they do not address the heart of the problem of why Saudis have very little success in creating scalable businesses that employ Saudis, especially the kind of business that invests in research and development and generates exports. There are many countries that outperform Saudi Arabia in these areas despite having infrastructure that is considerably inferior.
One exception is the area of cybersecurity, where the budget describes very specific programs and reports detailed jobs numbers. Saudi policymakers have correctly surmised that cybersecurity is a critical component of national security, and that there is no substitute for competent citizens operating key roles in the field.
However, both in the case of cybersecurity and in the case of megaprojects more generally, the concern is that the dependence on government leadership remains too high, and that the levels of private initiative remain too low. Several countries have succeeded in empowering their private sectors, and their experience will surely benefit Saudi policymakers: Finland, Indonesia, Malaysia, and Mexico have all substantially diminished their dependence upon natural resources, and produce advanced goods that compete in global markets.
These countries also teach us the importance of committing to comprehensive, long-term strategies, and the need for patience. How Saudi Arabia allocates its project resources over the coming 10 years will play an important role in determining Vision 2030’s success in its central pillar: creating private sector jobs for Saudi citizens.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.