Ishah   writes:  Nearly two years after oil prices began their precipitous decline, leading global producers are facing the prospect of major adjustments that will have far-reaching economic, social, and political consequences.

It seems that Saudi Arabia has embraced this challenge. This week, it issued its  VIsion 2030  plan for ensuring sustainable long-term growth. One key way Saudi Arabia hopes to achieve growth is by diversifying its asset portfolio, selling shares in the state oil giant Aramco to create a sovereign-wealth fund.

But Vision 2030 fails to address one critical issue: low labor-force participation. Only 41% of the working-age population is currently employed.

The key will be not just to increase employment, but also to boost productivity. After all, unlike more sparsely populated Gulf Cooperation Council (GCC) members, such as the UAE and Qatar, Saudi Arabia, with its population of nearly 20 million (excluding non-nationals), can no longer afford low labor productivity. Indeed, oil revenues now amount to only $5,500 per capita – far from enough to act as a sustainable alternative.

The Kingdom’s underlying political settlement depends on the royal family’s alliances with businesses, which have a free hand to import labor, and guaranteed public-sector jobs for citizens.

This settlement is traceable to the 1970s, when ambitious infrastructure programs turned local trading families into contractors, which then lobbied for more visas to staff up.

As a result, the Kingdom’s reliance on foreigners has no parallel in modern economic history.  In few other countries would nationals accept such open competition by foreign labor. Saudi nationals do, because they are employed by the state at above-market “reservation” wages.

But whenever the Kingdom has tried to reduce public-sector hiring, unemployment has increased. Under the current incentives system, the authorities’ plans to privatize companies and improve civil-service productivity will actually destroy jobs occupied by Saudis.

The challenge of creating jobs for Saudis may seem like a problem of riches. Some would argue that all the Kingdom needs to do is to substitute Saudi for foreign workers in existing positions. But simple substitution will not do. Current jobs are either too skill-intensive or not skill-intensive enough.

Structural change will be needed to upgrade manual jobs. Greater reliance on capital and technology will also eliminate many menial positions. At the same time, many high-skill jobs, largely a product of massive energy and capital subsidies, need to be downgraded to create more medium-skill positions.

The Kingdom has thus embarked on a “Saudization” program that requires businesses in some sectors to hire nationals. So far, the private sector has largely resisted these policies.

More than 200,000 young people enter the labor market annually. And as education levels continue to rise – nearly two-thirds of Saudi youth go to university – social pressure is set to grow as well.

The real constraint to job creation in Saudi Arabia is found in its particular political economy. With lower oil rents to share, the domestic social contract is coming under strain. Cutting support for either businessmen or the population will weaken it further.

How the ruling House of Saud will adjust remains uncertain.