20 June 2016
Saudi Arabia’s first five-year development plan, issued in 1970, made a prediction and a vow: “Economic growth over the coming decades will chiefly rely on oil production and revenues. But that is what the development plan aims to change, gradually, by diversifying the kingdom’s economy, exports, and the government’s sources of income.” The prediction materialized, facilitated by the unforeseen jump in oil prices in the wake of the 1973 war. The vow — to diversify the economy in order to decrease the reliance on capricious oil markets — proved more challenging.
But it was not due to a lack of trying. The kingdom, over successive plans, continued to hold out the diversification goal as official policy, perhaps no more articulately than in the tenth iteration, covering the years 2015-2019. The current plan offers a more solid understanding as to how the hoped-for diversification should occur. “The first five years of the 10th Development Plan mark the start of the 15-year transformation of the Saudi economy into a knowledge economy,” a high-ranking Saudi official told Oxford Business Group, a research firm, in “The Report: Saudi Arabia 2015”.
“Knowledge economy” is a broad label denoting products and services whose value derives chiefly from their knowledge content. In Saudi Arabia, a shift to a knowledge-based economy means the creation of economic sectors that draw on innovation in science labs and technology incubators, not the sale of hydrocarbon derivatives. The areas that the kingdom has started investing in include alternative energy and biomedical research.
A shift to a knowledge economy in the kingdom is both a necessity and an opportunity. While oil has made possible modern infrastructure across the country and underpinned expansive social welfare programs over the past five decades, the endurance of viscous crude as the kingdom’s main source of income has caused financial instability — as in the fiscal crises of the early 1980s and late 1990s when oil prices tumbled.
Meanwhile, over the past two decades, mounting scientific evidence connecting the burning of fossil fuel to long-trend atmospheric change has prompted dramatic responses in policymaking circles. In mid-October this year, an international deal was inked in Kigali, Rwanda, to limit the use of hydrofluorocarbons, a big contributor to climate change. John Kerry, the US secretary of state, described it as a “monumental step forward” in efforts to slow down disconcerting climate trends.
Along with India, the Gulf states have negotiated a nine-year exemption from implementing the Kigali accord, starting in 2028 instead of 2019.
The Kigali agreement came shortly after the Paris Agreement late last year, in which 195 countries have legally bound themselves to limit greenhouse emissions. The two largest greenhouse emitters, China and the US, have ratified the agreement.
In industry circles, two developments have occurred over the past decade, one in response to climate concerns, and both disruptive to oil supply and demand.
On the one hand, we have witnessed the rise of novel ways to extract the coveted crude oil from under the ground. Consider, for instance, the advances in extracting oil from shale rocks through so-called “hydraulic fracture” (or as it is commonly known, “fracking”), a process that led to a glut in oil supply in 2015, further depressing its price.
On the other hand, climate change fears have led to higher investment and innovation in alternative, greener energy and devices — from solar panels to advanced lithium-ion batteries and electric vehicles.
Combined, these factors have shifted the conversation in several oil-rich countries. The question is no longer how long oil reserves can sustain governments and societies into the future; it is how fast available oil riches can be deployed to develop alternative, sustainable sources of economic value.
In placing its bets on knowledge economy as the new engine of economic vigour, Saudi Arabia is opting for a model of proven validity. Abdelali Haoudi, KAIMRC’s head of strategy and business development, says countries large and small that have allotted significant resources to research and development (R&D), such as the US and Singapore, have reaped handsome payoffs in terms of commercially successful innovations and high-paying jobs.
Saudi Arabia has already taken several steps in the pursuit of such an ambition. Over the past decade, the government has accelerated its efforts to modernize and re-energize its higher education and science institutions. In 2002, the government announced its National Plan for Science, Technology and Innovation, which went into effect in 2008, with a budget (through 2010) of SR8.1 bn (~US.16 bn).
The past decade has also witnessed a notable increase in the number of public and private universities, from 20 in 2005 to 34 in 2012, including three modern women-only universities. Promising Saudi students have now three all-expenses-paid programs to pursue college and graduate studies abroad: the King Abdullah Scholarship Program since 2005, Saudi Aramco’s, and since 2008 from King Abdullah University of Science and Technology (KAUST).
These efforts were reflected in improved metrics for the kingdom’s performance on various indicators on science and innovation. For example, the number of scientific publications from the kingdom surged from 1686 in 2008 to 7000 in 2012, according to a 2014 report marking progress on knowledge economy indicators in Saudi Arabia. In 2013, the World Bank ranked Saudi Arabia 4th in the Arab world on a compound indicator for “knowledge economy” (including education, innovation, economic incentives for science and innovation, and information and communications technology). Also in 2013, Saudi Arabia ranked first among Arab states (and 29th globally) in the number of US patents it received, about a quarter of which came from Saudi Aramco.
Still, these successes come with their fair share of challenges. The infrastructure and regulatory environment have room for improvement, says Haoudi. While his area of interest and expertise — biomedical research — does have some powerful players operating in Saudi Arabia, they confine their activities to marketing and distribution, and conduct their R&D elsewhere. That is another challenge: to convince individuals and groups in the science community that Saudi Arabia is one of the better venues for doing science-producing innovation.
At the same time, Saudi Arabia occupies an advantageous position because of its oil revenues. Scientific research and innovation are increasingly a costly enterprise. The start-up costs for scientific research infrastructure pose an entry barrier that not all aspirants to a knowledge economy can surmount, says Stephen Weber of the University of California, Berkeley. Weber, a professor of political science, served as adviser to several Gulf governments, including Saudi Arabia’s and Qatar’s, on innovation and development projects. An example of this advantage is on display in the creation and renowned performance of KAUST, which is fast becoming a regional science powerhouse.
The trick, however, is to channel, in one direction, the energy from this flurry of effort and initiative. One solid indicator that such efforts are bearing fruit is if we see decreasing reliance on oil revenues over the coming years; for this has always been the original plan.
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