Saudi Arabia: Open for Business? A few changes the Kingdom could make to improve economic growth and attract investment
Saudi Arabia has spent billions of dollars investing in big, fancy projects in an attempt to diversify its economy and create more sustainable growth for future generations. The Red Sea Project, King Abdullah Economic City, “Knowledge City”, and King Abdullah Financial District are among those developments. Some of these projects, while bold and creative, are an attempt to build the biggest, best, and most expensive infrastructure just because one can. While executing mega-projects and investing in physical infrastructure may very well contribute to economic growth, there are other, less expensive solutions that could be implemented to help attract investment and provide for sustainable economic growth. These include concentrating developments on already-populated areas, improving living conditions for non-Muslim foreigners and, focusing on developing the country’s human resources. While this is not a comprehensive list of ideas Saudi Arabia can do to improve its economy, these considerations may help attract greater foreign investment.
Many of the projects listed above, including the future tourist zone, the Red Sea Project, and King Abdullah Economic City (KAEC), are being developed in areas that are distant from major population centers. The Red Sea Project will be developed between the cities of Umluj and Al Wajh, over 600 miles from Riyadh, the nation’s capital, and 300 miles from Jeddah, the Kingdom’s largest city on the Red Sea. KAEC, which is located on the coast of the Red Sea, is far away from Riyadh, making it a remote location for a potential center of innovation and economic activity. The geographic remoteness of these developments could mean less demand, leading to insufficient revenues and a low return on-investment. Not to mention, they will lack the benefits of “network-effects”, associated with being near busy cities.
Metropolises like Dubai, Doha, and Abu Dhabi modernized around existing population centers. Their proximity to highly-populated areas created demand for new products, services, and businesses. For example, Dubai’s business-friendly environment allows for streamlined registration processes that have attracted corporations such 3M, General Mills, and Citibank to establish offices in the city.
Looking at the other side of the globe can serve as a warning to the Saudis when developing in sparsely populated areas. China has built a number of new cities, predicting that their growing middle-class would flock to them. Many of these massive, beautifully-designed cities sit as silent ghost towns. Ordos, a new city in China’s Upper Mongolia Region, is one example. The city itself sits on one of the world’s largest coal reserves, yet almost two decades later remains largely vacant. The main reason for its unattractiveness to new residents is its remoteness and lack of infrastructure that would connect it to the rest of China. Moving forward, the Saudis should focus projects on population centers as well improve kingdom-wide accessibility to existing projects such as the Haramain High-Speed Train, which currently connects Jeddah to KAEC.
Saudi Arabia loses plenty of business to the United Arab Emirates, Qatar, and Bahrain because of its inability to attract foreigners to the Kingdom. These tiny Gulf states, who share the same religion and a similar cultural heritage, have adapted to the realities of globalization to become more attractive to foreigners. Many, if not all, hotels in places like Dubai and Manama, allow for the sale and consumption of alcohol by foreigners. While this may seem like a trivial difference, this is the difference that makes these countries far more attractive to non-Muslim expats and investors looking to do business in the region. Paradoxically, while allowing for alcohol in Saudi Arabia may seem like a needed change, cultural and religious sensitivities make it one of the most difficult to implement.
While beautiful new office buildings, state-of-the-art ports, and tourist resorts are wonderful additions to Saudi Arabia, the Kingdom will not benefit in the long run unless they are staffed and operated by homegrown employees, not expat workers. Additionally, the expansion of the private sector, one of the main goals of the Vision 2030’s national development strategy, requires an educated, entrepreneurial, and innovative population to bring forth new business ideas that do not mainly focus on the existing hydrocarbon-focused economy.
In terms of education, Saudi Arabia has improved internationally over the past several decades. Today, the majority of government spending is on education, and the successful Ibti’ath (study abroad) program initiated by King Abdullah, has given thousands of Saudis the opportunity to study in the United States and elsewhere. However, the Saudi government must ensure that it is incentivizing and promoting entrepreneurship and innovation at the ground level. This includes ensuring that financing is available for small businesses, decreasing the amount of paperwork needed to open a business, and certifying that Saudi women, who make up half of the total workforce, can work at jobs that do not require mandatory male supervision.
By re-developing populated areas, attracting foreigners, and evolving human resources, the problem of economic diversification and growth can begin to solve itself. These three areas need to be given the same level of importance as infrastructure and national defense. Saudi Arabia should take a valuable lesson from China and invest in existing, well-connected infrastructure, take note of what their Gulf neighbors are doing to accommodate expats, and adjust their domestic business environment to make the other half of their workforce more competitive. With just a few changes in their methods, the Kingdom could accelerate the diversity of its economy to better compete on the global stage.
Brett Sudetic is a Middle East Fellow at Young Professionals in Foreign Policy (YPFP). He is also an Analyst at LMI, where he works in defense and international business development. Brett received his MS in supply chain management from the University of Maryland. He speaks Arabic fluently and is proficient in Persian.