Economic Diversification Under Saudi Vision 2030: Sectoral Changes Aiming At Sustainable Growth David Havrlant and Abdulelah Darandary March 2021 10.30573/KS--2021-DP06 About KAPSARC The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a non-profit global institution dedicated to independent research into energy economics, policy, technology and the environment across all types of energy. KAPSARC’s mandate is to advance the understanding of energy challenges and opportunities facing the world today and tomorrow, through unbiased, independent, and high-caliber research for the benefit of society. KAPSARC is located in Riyadh, Saudi Arabia. This publication is also available in Arabic. Legal Notice © Copyright 2021 King Abdullah Petroleum Studies and Research Center (“KAPSARC”). This Document (and any information, data or materials contained therein) (the “Document”) shall not be used without the proper attribution to KAPSARC. The Document shall not be reproduced, in whole or in part, without the written permission of KAPSARC. KAPSARC makes no warranty, representation or undertaking whether expressed or implied, nor does it assume any legal liability, whether direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information that is contained in the Document. Nothing in the Document constitutes or shall be implied to constitute advice, recommendation or option. The views and opinions expressed in this publication are those of the authors and do not necessarily reflect the official views or position of KAPSARC. Economic Diversification Under Saudi Vision 2030: Sectoral Changes Aiming At Sustainable Growth 2 Executive Summary conomic conditions continuously focal sectors such as advanced manufacturing evolve. We easily notice sudden and services. We measure the impact on Saudi shocks, such as the 2008 financial Arabia’s economic structure of proceeding with Ecrisis or the recent economic downturn the diversification paths outlined in Vision 2030 by inflicted by the COVID-19 pandemic. At the applying the Shannon-Weaver index to sectoral same time, there are adjustments taking place gross domestic product (GDP) and household at a much slower pace, spread over decades income. We also conduct a sensitivity analysis with wide-ranging technological, structural, to scrutinize the benefits of diversification for the and social impacts. This study focuses on resilience of the Saudi economy to external demand such a long-term and wide-ranging change shocks. The developments in the expenditure envisaged for Saudi Arabia, outlined in the components indicate a move toward a more Saudi Vision 2030 initiative – a blueprint for advanced and sustainable economy overall, while the Kingdom’s socioeconomic transformation. the transformation within the energy sector points to The aim of this paper is to understand the a shift of Saudi Arabia to a modern energy hub that macroeconomic and structural implications provides fuels according to future demand. of Vision 2030’s key transformation targets and its implementation in more detail, with Indeed, the applied measure of economic an emphasis on economic diversification diversification indicates a considerable improvement and the associated sectoral adjustments. in sectoral diversity over the coming decade, which The discussion contributes to shaping the in turn will make the Saudi economy more resilient roadmap toward a diversified and sustainable to external demand shocks, as suggested by the Saudi economy. outcome of the sensitivity analysis. The preferred diversification pathways will promote the private Economic diversification is one of the pillars of the sector, boost local content, and produce higher transformation, as it is closely linked to benefits value-added exports, making the economy more such as resilience to external shocks, promoting self-sufficient and less dependent on revenues entrepreneurial opportunities, and developing the linked to the basic oil and gas sector. Some of national skills base, among others. To capture the diversification focal sectors are mostly in their the wide-ranging technological and structural infancy and have a vast potential for expansion, adjustments, we rely on the input-output framework, especially in creating value-added and higher-skilled which provides rich sectoral granularity and jobs, acquiring know-how and new technologies, represents the vital energy and petrochemical and establishing a basis for homegrown research sector well. We identify specific clusters of and development. Overall, the study tracks thematically linked activities that will contribute how the implementation of the Vision 2030 key most to the diversification process throughout this transformation targets could move the Saudi decade. These range from the well-established economy toward a sustainable growth model, mainly petrochemicals sector to new diversification through viable economic diversification. Economic Diversification Under Saudi Vision 2030: Sectoral Changes Aiming At Sustainable Growth 3 Introduction he last decade has brought about substantial sustainability over the coming decade. We introduce changes that have had profound implications the term ‘preferred diversification paths’ to mark for traditionally hydrocarbon resource-rich sets of thematically connected economic activities. Teconomies. Some of the adjustments have been in These are mutually coherent from a macroeconomic response to changes on the supply side, such as perspective and reflect Vision 2030 transformation the shale oil and gas revolution in the United States targets. This discussion paper examines Vision and the discovery of new reserves worldwide. Other 2030’s preferred diversification paths for the Saudi adjustments have been in response to changes on economy in more detail, with a focus on the foreseen the demand side, including increasing support for adjustments in the sectoral composition of the renewable energy and an expansion in the use of economy, alongside broader macroeconomic shifts. electric vehicles. Whether global oil demand will peak is currently under discussion, while oil supply has This paper’s evaluation of the impacts of the shifted from being scarce to relatively abundant by diversification measures is based on the updated historical standards. Carbon pricing could prove to Vision 2030 Input-Output Table (V2030 IOT), which be another crucial adjustment factor – attributing a maps the changing structure of the Saudi economy global value to carbon may speed up the transition over the coming decade. While a traditional IOT to clean energy and may also provide an opportunity represents a static snapshot of an economy in a for growth in renewables or carbon capture use and single year, the V2030 IOT is dynamic and captures storage. Besides these longer-term transformations, the expected economic transformation until 2030 oil-exporting countries are also exposed to sudden (Havrlant 2020). The tool enables a better grasp of and severe shocks, such as the 2008 financial crisis a particular economic plan and sets the basis for a and the recent economic downturn caused by the future assessment of the transformation. We discuss response measures to the spread of the COVID-19 the assumed expansion of the diversification focal virus. This produced pronounced declines in global sectors, their changing contribution to the country’s oil prices and a substantial reduction in government overall economic activity, and identify the preferred income and overall wealth. diversification paths for the Saudi economy. The advances in economic diversification are measured Economic conditions may change radically over by applying the Shannon-Weaver index to sectoral either the short or long term. The question is gross domestic product (GDP) and household whether there is no other option for a hydrocarbon income. This measurement indicates a considerable resource-rich economy than to be held hostage to the increase in the diversity of the country’s economic fluctuations in global oil prices, which are likely going structure facilitated by the implementation of the to remain part of macroeconomic developments Vision 2030 key transformation targets. The expected and cycles. The general solution to a changing sectoral changes are wide-reaching, so basic environment is: adapt! From the macroeconomic macroeconomic relations, such as an increase in the perspective, this means diversifying the economy relative share of household income and consumption, to broaden its income base and significantly reduce reflecting the buoyant expansion of the private its dependence on oil revenues. Saudi Vision sector, are also subject to adjustments. The share 2030 (CEDA 2016) represents a complex plan for of the services sector is set to almost double over substantial socioeconomic transformations that will the projection horizon, while non-oil exports should move the economy toward more diversification and benefit from further progress in advanced Economic Diversification Under Saudi Vision 2030: Sectoral Changes Aiming At Sustainable Growth 4 Introduction manufacturing. Both manufacturing and services The next section discusses economic diversification will likely contribute to an increase in local content more generally, focusing on its broader benefits and as import intensity recedes in areas with higher measurement. Section 3 provides the background value-added, such as advanced metal and plastic on the updated V2030 IOT, which creates the products, pharmaceuticals