World Economy

Forbes Says S. Arabia Reform Won’t Work

Forbes Says S. Arabia Reform Won’t WorkForbes Says S. Arabia Reform Won’t Work

Much is being made of Saudi Arabia’s plans to reform its economy. The idea that it needs to move away from dependence upon oil is an obvious one. And yet it should also be said that the plans are much too timid and almost certainly won’t in fact work.

More than that, there’s not really anywhere that has planned itself into wealth in the manner that the Saudis seem to think is possible. Most certainly there are things that both must be done and can only be done by government, Forbes reported.

But economic wealth comes from doing those things and doing them well (in the jargon what economists call the “institutions”) and then getting the heck out of the way of everyone else creating that economic wealth.

This is true even of China’s economic rise in recent years. And it’s even more true of trying to move from middle income to the edge of the technological and productivity envelope. There’s very definitely good ideas in these plans: but too many that won’t work as well.

Saudi Arabia’s new plan to lessen the kingdom’s dependence on oil, is making headlines because the country’s name is synonymous with crude exports. If even the Saudis, with the biggest and most easily extractable oil reserves in the world, are getting serious about diversification, something is changing.

Diversification Attempt

A closer look at the National Transformation Program, however, suggests that the Saudi diversification attempt probably won’t achieve much: It’s not bold enough in the area that matters most—developing human capital.

"I disagree with that specific criticism but agree with the general idea. There’s not enough radicalism here, it’s too timid," Forbes' Tim Worstall said.

Water and electricity subsidies are to be cut by 200 billion riyals ($53 billion); the tariffs charged on water would cover 100% of actual costs, versus 30% now.

That, for example, is excellent. There really never has been any point in the government budget subsidizing the extraction of aquifer water to grow wheat in the desert. Subsidies to provide domestic water supply to poor households are just fine. But to irrigate the desert? No, better by far that farming pay the full economic cost of water, so too industry. And if that means that such production does not take place in Saudi Arabia then that’s what should be happening. If it’s more economic to do these things elsewhere then they should be done elsewhere.

The Chinese Way

In the 20th century, those places which had detailed management and planning of the economy did not grow. Those places which had the right institutions in place and then let the market rip did grow. One startling statistic is that the Soviet Union, in its 70 odd years of existence, managed to increase total factor productivity by not one whit or iota. Over roughly the same time period the market economies managed an eightfold increase in the real income of the average citizen.

The actual answer to this is to heed the lesson of Chinese economic development over the past 40 years. And the development there has been startling. Today it’s about as well off as England was in 1950, perhaps 1955. That’s a whole heck of a lot of economic development in such a short period, recapitulating three and a half centuries in a little over 35 years. A startling performance in fact: and one that others should take heed of. That non-state part of the Chinese economy is quite possibly the most viciously free market economy in the world right now. And that’s where pretty much all of the growth has been occurring.

This is the point where everyone else should take heed. Sure, there’s Chinese plans galore for this and that. But most of the growth has been taking place off plan as people just get on with things themselves.

The correct economic development plan is therefore to do some of those things that Saudi Arabia is contemplating. Price resources at market prices, ensure the efficiency of the commercial legal system, most certainly good ideas. And then simply get out of the way and let people get on with it.

That would be a good advice for our own rulers too but far too many jobs within the Beltway depend on no one realizing that. Decent economic growth depends on the radical idea that it doesn’t need management nor planning, just the environment and the freedom within which it can happen.