A look at Saudi Arabia as it tries to shift from oil to a diversified economy

 

Crown prince Mohammed bin Salman has opened up the kingdom

The new face of Saudi Arabia

Under the youthful crown prince known as MBS, the country’s de facto ruler, the kingdom has pursued ambitious reforms to transform itself into a thriving 21st-century economy. Simon Wilson reports

Has the country really changed?

Yes, in important ways Saudi Arabia has changed radically in the ten years since King Salman ascended the throne aged 79, and his son Mohammed bin Salman (MBS) became the country’s de facto ruler (as crown prince from 2017 onwards). Ten years ago, women were still shut out of the labour market and public life, prohibited from driving or even leaving the house without a male guardian. Today, they are free to work and travel where they like. Many have ditched the burqa for a simple headscarf. The religious police and “vice squad”, once a ubiquitous presence, have disappeared. Schools have slashed the amount of time devoted to religious instruction. What was once a closed and repressive society has opened up in myriad ways, and become far more akin to other Gulf and Middle Eastern states.

So it’s become a democracy?

Hardly. Saudi Arabia remains an autocracy, where a super-privileged elite hold power and the crown prince does not brook dissent. But the country no longer sponsors and exports jihadist terrorism and is a “force for order” and a “stabilising influence in the Middle East”, says The Economist. It counsels restraint on the conflict in Yemen. It is open to better relations with both Iran and Israel, and has helped Syria’s new government by paying some of its debts. If not exactly an enlightened despot, MBS – still aged just 39, and poised to become king for decades – is at least a sane and increasingly pragmatic one. 

What about the economy?

MBS’s stated mission, under his Vision 2030 rubric, is to transform Saudi Arabia from a petro-state into a diversified 21st-century economy with a flourishing private sector – readying it for the day when the oil runs dry. The hard truth is that while a start has been made, there is much left to do. Oil’s share of the economy remains high, too, although it has fallen from 36% of GDP in 2016 to 26% last year, according to official figures. However, other estimates put the share rather higher than this. And once all economic activity related to oil and gas extraction is factored in, almost half the Saudi economy (48%) is hydrocarbon-dependent, according to the World Economic Forum (WEF). And oil still accounts for between 60% and 75% of government revenues, meaning the House of Saud’s fragile social contract is still underwritten by the nation’s oilfields.

So the oil price is a worry?

According to projections by the International Monetary Fund, Saudi Arabia needs the global oil price to be more than $90 a barrel in order to balance its budget. Prices are currently a little above $60, and are not expected to rise much this year. Goldman Sachs has lowered its year-end 2025 oil price forecast to $60 a barrel for Brent crude, and $56 next year. If prices were to stay around $62 this year, Saudi Arabia’s 2024 budget deficit of $30.8bn would more than double to around $70bn-$75bn, according to the bank’s Middle East economist Farouk Soussa. “That means more borrowing, probably means more cutbacks on expenditure, it probably means more selling of assets, or all of the above, and this is going to have an impact both on domestic financial conditions and potentially even international ones.”

What about debt?

The lower oil price is a worry, but it’s not about to precipitate a debt crisis. At the end of last year, Saudi’s debt-to-GDP ratio was just under 30% – modest compared with the likes of the US (124%) or France (111%). Riyadh still has significant headroom for borrowing. Yet $75bn in debt issuance would be hard for the market to absorb, and the Saudis will need to look at other solutions. In terms of cutting expenditure, many regional economists believe that some of the flashier projects, such as the vast, futuristic “linear city” Neom, will be further scaled back. Other such projects, estimated to cost nearly $900bn by 2030, include 50 luxury hotels strung along the Red Sea, a ski resort in the desert, and the world’s biggest building in Riyadh. There’s also the possibility of selling more domestic assets, including stakes in the state-owned companies Saudi Aramco and Sabic.

What sectors are thriving?

Perhaps more important than such projects are the “government’s efforts to foster new industries, from tourism to carmaking”, says The Economist. Meanwhile, civil servants are rewriting rules on everything from divorce to foreign investment, with more than 600 packages of reforms in the works. A liberalisation of mortgage lending means that construction is booming. Retail and hospitality are growing fast, as is tourism, which has jumped from around 60 million overnight stays in 2016 to more than 100 million in 2023 (the bulk of this being domestic tourism). Yet the Saudi economy remains a textbook case of “crowding out”, where the state’s dominance of key sectors has stifled private investment and enterprise. About half the male labour force work as civil servants and political connections remain vital to doing business.

What does the future hold?

One ambition is to establish strength in artificial intelligence (AI) and data centres. Saudi’s new state-owned AI company Humain has signed deals worth $23bn with US tech groups including Nvidia, AMD, Amazon Web Services and Qualcomm, according to its chief executive. And it has launched a $10bn venture-capital fund as it leads the kingdom’s effort to become a global AI hub. It’s currently in talks with US groups including OpenAI, Elon Musk’s xAI and Andreessen Horowitz about its plans. But allied to these lofty ambitions are more prosaic goals – improving the country’s education system; attracting the expertise needed to boost emerging sectors, including carmaking, semiconductors and renewable energy. Social liberalisation may have bought the regime some time in terms of pushing through economic reforms. But those reforms are just getting started.

We CAN do infrastructure

•  People say Britain cannot build anything anymore. But that's not true everywhere
•   Coventry is building tram lines on a timescale measured in weeks, not years
•   The track costs around £15 million per kilometre; elsewhere, £100m-plus is common

People say nothing works in Britain. That we cannot build anything any more. We hear about a decade of form filling before a spade is in the ground. Then, when we finally get going, only our grandchildren have a hope of seeing it actually built. But that’s not true everywhere.

On March 14, digging started on a busy Coventry street to build a tram line. An experimental project aiming to do everything differently: modular pre-made sections of tracks; fast-tracked planning; and – crucially – a construction process so gentle that it would not touch the jungle of cables and pipes snaking beneath our streets. This ‘keyhole surgery’ approach to building the tram meant regular traffic was still running along the remaining lanes on the street.

Four hours later, 30 centimetres of asphalt was removed ready for the track to be laid. Most tram projects would dig twice or three times as deep, knocking into every pipe, cable and sewer on the way, all of which would be dug and laid nearby. But when I visited recently, shallow concrete slabs with track in place had already been laid. Trams could have been running. 

On May 19, just eight weeks after work began, trams will flow up and down the street alongside normal traffic. To put that into perspective: Edinburgh took six years and Manchester four years to build their systems. That is not even counting planning time.

The other benefit? It is cheap. The track is expected to cost around £15 million per kilometre, far less than the £100m-plus that many British projects are coming in at. So how have they achieved delivery at a fifth of the cost and on a timescale that would make Edinburgh’s engineers wince? 

The answer is twofold. First, they bypassed the traditional planning red tape that burdens many tram projects by avoiding a Transport and Works Act Order because they already own the streets. This approval process costs millions and delays schemes by years. They also did away with major street redesign. As Hamish, the lead contractor, told me: ‘This is about putting trams into the street, not redesigning the entire street for trams.’

This light touch approach avoided prohibitive drainage regulations. In another project, an eight-metre-deep tank had to be installed simply because the surface area of the tram scheme was large, even though the existing area was already a six-lane road. Engineers will tell you ten more stories like that, each with six-figure consequences.

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The second secret sauce is the track itself. Using a specific type of concrete and patented construction methods, only 30 centimetres of road is dug away to lay track. Not a single utility was moved. And if the water company needs access in five years’ time, that is no problem. You just lift a single module and work overnight. Worst case: you get a replacement bus the next day.

Coventry City Council owns the intellectual property. Hopefully it can export the technology across Britain and to Europe and beyond. It could be a rare British success story. All components are currently made here.

With 1.5m homes to build and cities up and down the country seeking growth, installing sleek, reliable and efficient transport should be top of the shopping list for mayors and council leaders. We should be grabbing the chance to build trams at a fraction of the cost and on a timescale measured in weeks, not years. Let’s send mayors and council officials to Coventry to learn how. 

A broad look at productivity - usually driven by a few firms:

 May 13, 2025

How a Small Share of Firms Drive Economic Growth

My guess is that everyone would be happier if economic growth was evenly distributed, so that everyone’s income rose in lockstep. Instead, growth is a disruptive process, with some firms and sectors rising while others decline. As a wise economist once put it, the process growth could in theory be like “yeast,” with everything expanding at once, or like “mushrooms,” with spurts of growth in cerain areas. But most of the time, it’s mushrooms.

A team from the McKinsey Global Institute writes about the mushrooms in “The power of one: How standout firms grow national productivity” (May 6, 2025). The thesis, as stated in the subtitle: “National productivity growth is a matter of few firms taking bold strategic action rather than millions of firms raising efficiency.” For the relatively short time frame they analysis in this study, from 2011 to 2019, this seems likely to be true.

The authors have a dataset of 8300 firms across the US, UK, and German economy, all with at least 50 employees and many with more than 500 employees, and focused in four sectors: retail, automotive and aerospace, travel and logistics, and computers and electronics. They refer to this limited group of companies in each country as a “lab economy.” define a “Standout” firm as a company where the productivity growth in that single company, by itself, adds at least 0.01% to the productivity growth of the entire set of companies for the lab economy in one country. Conversely, they define a “Straggler” firm as a single company that, by itself, subtracts at least 0.01% of productivity growth from the entire economy. Of courses, most firms are between these extremes.

Two conclusions frm the report seem worth emphasizing, in part as explanations for why the US economy has been outperforming the UK and German economies.

First, a relatively small number of Standouts and Stragglers can drive the overall productivity growth patterns of an economy. The report notes: “Fewer than 100 firms in our sample of 8,300—a group that we have dubbed Standouts—accounted for about two-thirds of the positive productivity gains in each of the three country samples we analyzed. … To give a sense of how important a single firm can be, just another dozen or so of the largest Standouts could have doubled productivity growth in their entire country. … In the United States, for instance, 44 Standouts—5 percent of sample firms, accounting for 23 percent of employment share—generated 78 percent of positive productivity growth. … US Standouts included household names like Apple, Amazon, The Home Depot, and United Airlines.

Second, the US has a higher proportion of Standouts relative to Stragglers, compared to the UK and Germany: “US productivity growth from 2011 to 2019 was faster than that of the other countries in our sample at 2.1 percent, compared with 0.2 percent in Germany and close to zero in the United Kingdom. … The US sample had three times more Standouts than Stragglers, while the German and UK samples had almost even numbers.”

Third, US Standouts are more likely to grow and expand, while US Stragglers are more likely to contract, compared with the UK and Germany: “Firms in the US sample had more reallocation of employees from less productive to more productive firms. Leaders grew faster, and underperforming firms more swiftly restructured or exited. In the United States, Standouts include scalers (firms far above average sector productivity that contribute by gaining employees) and restructurers (firms with below-average sector productivity that contribute by losing employees). In Germany and the United Kingdom, this was not the case. Rather, these countries preserved underperforming firms as Stragglers. Frontier firms scaling and gaining share added 0.6 percentage point to productivity growth in the United States, and unproductive firms exiting contributed an additional 0.5 percentage point. Overall, dynamic reallocation, including reallocation across subsector boundaries, added 0.9 of 2.1 percentage points—slightly less than half—to productivity growth in the US sample. In contrast, the contribution of reallocation was negligible in Germany and the United Kingdom. This may be explained by the fact that the United States has highly dynamic factor markets, allowing for quick entry and exit as well as fast scale-up and restructuring.

I’ll add that over longer time periods, the “standout” firms will change, and gradual gains by all of the intermediate firms will loom larger. As the report notes, “The millions of MSMEs [micro, small, and medium sized enterprises] outside our sample collectively contributed up to 30 percent of productivity growth in the four sectors in the national statistics. Indeed, a handful of them may emerge as the Standouts of tomorrow.”

Perhaps the bigger lesson is that all nations claim that they want dynamic standout “superstar” firms (for previous discussions of the role of such firms, see here and here). But then, when those dynamic firms start expanding, they create economic disruption and start driving other competitors out of business. At that point, political pressure will arise to rein them in. But sustained economic growth, at least in the short- and medium-run, is typically mushrooms, not yeast.

Fac

Very relevant for the "disruptors to growth" lesson - UK/financial rules

 

Rachel Reeves warned of risk to fiscal rules amid growth downgrade

OECD cuts forecast for UK growth for this year and next on rising trade uncertainty, high interest rates, and falling confidence

Mehreen Khan

, Economics Editor

Tuesday June 03 2025, 8.00am, The Times

Economics

Rachel Reeves

Spring statement 2025

Rachel Reeves, pictured with the prime minister Sir Keir Starmer, has been warned by the OECD that there is “a significant downside risk to the outlook if the fiscal rules are to be met”

REUTERS

Rachel Reeves has been warned she is at risk of breaching her fiscal rules if the UK economy is hit by a growth shock by the Organisation for Economic Cooperation and Development.

The Paris-based OECD has become the second major forecaster in two weeks to tell the chancellor that her “thin” fiscal buffers mean she could breach her deficit reduction target after the International Monetary Fund did so last week.

In its annual outlook on developed world economies, the OECD downgraded the UK’s growth outlook for this year and next on the back of rising trade uncertainty, high interest rates, and falling household and business confidence. The economy would expand by 1.3 per cent this year, down from an earlier estimate of 1.4 per cent and slow to 1 per cent next year, lower than an earlier projection of 1.2 per cent, the OECD said.

• OECD warns Reeves over risk to fiscal rules – follow live

Slowing growth means the UK’s public finances “are a significant downside risk to the outlook if the fiscal rules are to be met”, the OECD said.

“Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks.”

Reeves left herself just under £10 billion in breathing room to meet her fiscal rules in the spring — one of the narrowest buffers on record. The chancellor’s main fiscal rule is to balance day-to-day spending with tax revenues by the end of the parliament.

The OECD’s intervention comes ahead of next week’s spending review, where Reeves is under pressure to manage ministerial budgets over the next three years after a recent U-turn on limiting winter fuel payments to pensioners.

The OECD advised the chancellor to strengthen the public finances with a “balanced” spending review and autumn budget which “combines targeted spending cuts, including closing tax loopholes; revenue-raising measures such as re-evaluating council tax bands based on updated property values; and the removal of distortions in the tax system”.

According to its projections, the UK’s budget deficit is on course to shrink from 6 per cent in 2024 to 4.5 per cent next year on the back of higher tax receipts. But higher market borrowing costs and interest rates mean the debt pile will expand to 104 per cent of GDP in 2026.

“Further supply-side reforms, including the overhaul of the National Planning Policy Framework, are expected to increase potential output and could help to lower fiscal pressures in the longer run,” the OECD said.

The Bank of England is expected to slowly loosen monetary policy with three interest rate cuts over the next 12 months, the forecast said.

In its first projections since President Trump launched his tariff policy, the OECD said global growth would expand by 2.9 per cent this year, compared to a March forecast of 3.3 per cent. The US received one of the biggest downgrades, with the economy expected to slow to a pace of 1.6 per cent this year after a 2.8 per cent expansion in 2024. Consumer price inflation will also climb to an average of 3.2 per cent from 2.5 per cent last year.

“Weakened economic prospects will be felt around the world, with almost no exception. Lower growth and less trade will hit incomes and slow job growth,” Alvaro Pereira, chief economist of the OECD said.

Something concrete for the trade vs aid debate:

 

• Yoweri Museveni

A plane from Africa can fly Britain to its global future

Uganda does not need aid to prosper; it needs to trade with the United Kingdom. That will benefit both sides

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Credit: ABUBAKER LUBOWA/REUTERS

Yoweri Museveni

25 May 2025 4:32pm BST

Last week, we saw a glimpse of Britain’s present and future. First, a “reset” with the European Union, touted by London as a step to lower barriers and increase trade in similar food and fresh produce between neighbours. Second, a Ugandan plane flying direct to the UK for the first time in more than two decades, carrying a cargo of produce that Britain cannot grow. 

It is not for the leader of a country far away to judge the rights or wrongs of closer trade cooperation between Britain and Europe. But what is undeniable in 2025 is that the oft-quoted “first rule of trade” – that proximity matters – is a fiction. If it were true then the proportion of trade the UK conducts with the rest of the world would not have accelerated for the last 20 years, while in parallel trade with its continental neighbours declined.   

It is a fact that many nations around the world proudly possess older and deeper ties to Britain of shared language, culture, and trade. Many, like my own country Uganda, are members of the Commonwealth, and have sought to re-kindle brotherly relations since Brexit in 2020. 

The fruits of this opportunity are increasingly visible: trade deals have been signed with Australia, New Zealand, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and India. This shows just how many seek to recalibrate the old bonds that predate Britain’s time in the EU, and how regardless of any reset with your neighbours your country’s trade relations are now permanently global.

That’s why the landing of Uganda airlines flight UR110 at Gatwick last week represents such potential. There is simply no reason in today’s world why Britain should not seek to increase trade with every continent – and not least Africa when it contains 11 of the world’s twenty fastest-growing economies. 

In the UK – and her continental neighbours – green beans cannot be grown beyond the summer. Coffee beans cannot be grown at all. In Uganda, both – and more – can be harvested all year around. When much of what you and your neighbours grow is similar, and according to the same seasonal rotations, that makes them as much trading competitors as partners. Uganda, on the other hand, is complementary. 

But we are ahead of ourselves. There are many barriers to trade between Britain and Africa and they will not be lowered by the first planeload of coffee, chocolate, and chillis on flight UR110. Those will be lowered by trade agreements that reduce tariffs, by addressing non-tariff barriers to trade and, just as importantly, by challenging prejudices about Africa – prejudices Africans too must work hard to combat. 

In 2023 the UK launched the Developing Countries’ Trading Scheme, a post-Brexit trade policy that reduced – in many cases to zero – tariffs on a raft of products for 65 emerging market nations with more than half from Africa. 

This major statement of belief in free trade and reengagement with the world was welcome. Yet lowering a tariff on, for example fresh produce, does not automatically mean a single extra pea or mango will be imported. The most devastating barrier facing African farmers – indeed most worldwide – are the non-tariff barriers put in place in the name of food standards. 

Everyone wants safe and clean food, and who has not tasted the best when it is grown naturally, in a garden, smallholding, or allotment? Yet such produce would not be legally permitted for sale in a single British supermarket under a constellation of rules and regulations slated to both protect and seemingly at the same time to remove all taste. 

Extreme certification and regulatory barriers are destined to benefit huge commercial agribusinesses that can afford to meet them, while they wreck the chances of smaller producers through prohibitive costs from exporting to the UK. This is a system that empowers not people but multinationals.

There must be a solution between friendly nations that with sufficient imagination can land a happy medium. That same approach should be turned to address preconceptions about Africa and its expectations of relations with Britain. 

Too many in the West believe Africans want their charity, and their money. They are wrong on the first, but right on the second. We do not want your aid; we want your trade. We want the honesty of being trading partners, not the dependency of handouts. 

Help yourselves by helping us supply you with the food and goods you cannot produce. Sell to us the services and goods we cannot make. Manufacture and assemble with us and bring in technology and we give you the raw materials. This is what the future of trade looks like. Britain can make the first planeload of Ugandan produce in two decades not a footnote in its new global trade relations, but the reawakening of something older and more complementary than we have known for a long time. 

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Yoweri Museveni is president of Uganda