Saudi Vision 2030 must tap rich parts of the private economy

December 27, 2016 By in Economy, Finance Tags: ,

Using Saudi Vision 2030 as an example, in a previous article I pointed out that economic reform is difficult to get perfectly right on your first try, but I also pointed out that complaining about it without trying to provide solutions is usually an ineffective strategy for providing feedback to the decision makers. Especially since Thursday, when the Saudi government unveiled its budget in a manner providing a large increase in transparency and comprehensibility. The state continues to improve its part in achieving Vision 2030.

The Arab Spring, Brexit and the probable demise of EU 1.0, and Donald Trump’s plans are a product of the mismanagement of economic reform. This is not an article about politics and I take no sides here. This is an article about economic reform and how it has the power to change history. The idea here is to provide different ways of looking at economic reform to create tools that might be useful to all stakeholders.

Let us start with Mr Trump and his election as president of the United States. The mainstream commentary is that Mr Trump won by tapping into a segment of the American voters who felt economically harmed if not completely abandoned. This segment easily approaches half of the voters. We’ll call them the economically disenfranchised for the purpose of our discussion.

The main statement that Mr Trump has made with regards to the American economy is that he will be amending existing trade arrangements, whether by ending formal agreements, by limiting the ability of American companies to send jobs offshore and even by imposing punitive import taxes to drive down demand for imported goods. This resounded quite strongly with the economically disenfranchised. Why?

 Global trade was supposed to be good for the world and in particular America, the world’s economic powerhouse. The basic argument for trade is that demand increases and/or production becomes cheaper. There are different arguments behind the reasons that this should be including comparative advantage and economies of scale.  Regardless of these reasons the net result is that the national production landscape, and therefore the job market, will be affected. Many have suggested that this has led to massive unemployment, or at the least a degradation in employment leading to lower income. I do not disagree with that. I do disagree with the idea that these changes are long term and that the economic pain was unavoidable, which leads me to disagree with the idea that economic reform in terms of global trade over the past decades was bad.

The transition of an economy will necessarily change the national market demand for skills. Some existing skills will no longer be required, others will see an increase in demand and there could well be some new skills required. This is where things went wrong. While it takes years to build production capability to new geographic markets, it takes generations to change or build skills. The American elite became richer while the workers literally became redundant.

In the long run, future American generations will be taught the skills necessary to compete in today’s markets. But America’s workers of today were made redundant with the stroke of a pen when trade agreements were signed. Is trade bad? I do not think so. But I do think that if the benefits of trade widen, the large disparity between today’s worker and the businessman will also widen. What was unfair became inhumane.

The answer should have been this – trade is a long-term good for America’s economy but in the short term the rich will receive greater riches while the middle class slips down the income curve. Therefore, a transitional tax system should have been overlaid on to the existing one to transfer most of these benefits to where they belong – the average American.

Returning to Saudi Vision 2030, the public complaints that I am aware of compare government employees with government ministers. The more effective comparison in economic terms is between the worker and the businessman. It is not enough for utility subsidies to be greater for the rich, that is simply a drop in the bucket. There needs to be a corporate tax comparable to the about 50 per cent or higher that western Europe levies on its companies. The same goes for a personal income tax as well as related taxes, such as a 50 per cent inheritance tax.

Why is the state selling its assets while the rich do not contribute? No economic system works if it is based on using the state’s assets as a safety net. If the state is willing to sell assets, several hundred billion dollars so far and up to the two trillion dollars envisaged, then shouldn’t the rich and the private sector also be held accountable in the same manner as in developed markets with successful economies?

Saudi Vision 2030 should evolve not by taking away from what I consider a strong foundation, but by adding more flows from the rich parts of the economy to those who will be most affected – the Saudi worker.

This article was originally published in The National.