The Role of the Private Sector in Delivering Sustainable Economic Development in Rentier States (The case of Saudi Arabia)

Abstract

The energy system transformation presents challenges for all countries, but rentier states face a unique vulnerability, as their entire economic structure depends on resource rents. While these states are accustomed to economic volatility and have experience in managing it, the energy transformation represents a long-term existential threat to the sustainability of their current economic model, effectively imposing a deadline for economic diversification efforts. The rentier state’s response to the energy system transformation presents challenges to many oil- and gas- producing countries in terms of their current domestic rentier arrangements and their path toward sustainable future economic growth. Despite the challenges associated with the energy system transformation, it presents Gulf rentier states with an opportunity for policy reform and economic diversification—an objective they have pursued for decades with only limited success. The response of these countries to the energy system transformation is crucial not only for the sustainability of their own development but also because of their role as major players in global oil and gas markets, particularly as demand begins to fall and the implications that has for global energy security. This study examines the role of the private sector in encouraging economic diversification to promote a more sustainable economic development model in a specific category of non-Western economies: the rentier states of the Gulf. Drawing from a range of qualitative data, including documentary analysis, business interviews, questionnaires, and focus groups with young Saudis, the findings of this study exemplify the critical role of the state in shaping economic transformation. The findings indicate that slower progress in fiscal diversification reflects the continued reliance of both the economy overall and the private sector on government expenditure. This means such states continue to be highly vulnerable to the risks posed by the global energy transformation. The emergent model is likely to be a mixed economy that remains engaged with hydrocarbons through the Circular Carbon Economy model while incorporating elements of private sector development alongside a degree of state control. While the state appears aware of the demographic pressures and associated risks, its current policies and the top-down imposition of a new social contract have yet to deliver meaningful employment that meets the aspirations of the large, young, educated population. This study deepens our understanding of how resource-abundant economies navigate the challenges posed by energy system transformation. It provides a broader perspective on the transformation of economic systems and the potential emergence of a distinct model of state capitalism in rentier states. It also provides an understanding of youth perspectives, social implications and the aspirations and attitudes of job seekers toward private sector employment and entrepreneurship.