Enacting Economic Reform

In and around the region we are seeing lots of economic and economy-related reform, be it Egypt’s floating of its exchange rate, the UAE’s reduction and removal of certain subsidies as well as enacting laws or India’s currency-note move aimed at stamping out the black market. But by far the most intriguing, transparent and far reaching is Saudi’s Vision 2030, which I will address in this first part of my series on economic reform.

Turning around an economy is far more complex and challenging than turning around a company but there are lessons one can learn and apply. In discussing the merger of FGB and NBAD I talked about the primary importance of culture and in a separate article I discussed a more intelligent way of downsizing.

The common thread in these two articles is that the employees of a company and the culture that they create are of critical importance to the success of any restructuring, the business equivalent of economic reform.

There are some key differences that are important to highlight though.

First, although a company can fire employees, thus ending any further liability, a government cannot fire citizens, and therefore those liabilities will continue. Second is that in a company you can control the hiring of employees, while in a country it is next to impossible to control the birth of new citizens, much to China’s chagrin. The third difference that I would like to draw your attention to is that changing the culture of a company might be difficult but can be achieved, usually by firing a lot of people. Changing the culture of a country is extremely challenging and usually requires generations for ideas to change, specifically because citizens cannot simply be replaced.

When talking about companies I usually address my article to the senior management. When talking about an economy I would like to talk to the citizens and discuss how they can make their views better heard.

I have seen an interesting video interview discussing the fairness of Vision 2030 and read an impassioned article pointing out that McKinsey, assumed to be a consultant on the project, looks only at economic impact and does not solve or care about social issues. These both make for extremely valid points but in my opinion they are ineffective in reaching decision makers. Let us look at why this is so.

There is a difference between a complaint, whereby someone points out a problem, and a criticism, which I define as a complaint plus a potentially better solution.

Complaints from an adult will usually be ineffective, since if the adult does not think for himself and provide an alternative solution then why should the decision maker? However, if a solution is provided then other stakeholders will listen with a much more open mind.

As our first example let us look at one of the fairness complaints in the video I spoke about. In the following I will use numbers as an example, which while illuminating the issue, they do not necessarily reflect the actual numbers.

The fairness issue has to do with the cuts in the salaries of government employees, which were across the board equal in percentage. The issue raised was that if the cut were to be 20 per cent then this would have a much greater effect on the average employee who makes 12,000 riyals (Dh11,750) per month versus a minister making, for example, 70,000 riyals. Why? Because the minimum cost of living for the average employee might be 11,000 riyals after deducting mandatory expenses such as mortgage or rent, education, health, utilities, food, etc. The minimum cost of living for a minister should be the same, but let us assume they are spoilt and need 33,000 riyals, triple the amount of the average employee.

The 20 per cent cut could drop the employee to an income of 9,600, which is below his minimum cost of living, while the minister would remain comfortable after a cut to 56,000 riyals, well above his cost of living. It is the same as the difference between taxing revenue and taxing profit.

Although the actual way cuts were made is more complex, the fairness issue is valid. But the decision makers are responsible for fairness not only across income classes in the current generation but also for future generations.

Think of it this way, if there are about 1.2 million Saudis working in the public sector and there are say 10,000 in the top echelon, then a 1,000 riyal drop for the average worker generates a 1.2 billion riyal savings per month, or 14.4bn riyals per year, while a 10,000 riyal-per-month cut for the top echelon saves only 100 million per month, or 1.2bn per year. Fairness between average employees and senior employees does not solve the budget deficit.

It is no use telling someone who is trying to save the country’s economy that they are not being fair if what you are suggesting has zero impact on the actual prospects of the economy. This is extremely important. If you just complain nobody is going to care. You need to provide viable alternatives and we will discuss this in a subsequent article in the series.

As for the impassioned article asserting McKinsey’s complete lack of empathy or compassion in dealing with Saudi citizens across the whole population, I agree completely if it is true. But what is the alternative? I think that it is important to accompany such a complaint with a solution. I am no expert on these issues but perhaps various committees representing different population groups might be formed and a consensus solution presented. But guess who should be forming these committees? The citizens themselves.

Pointing out one’s pain via the media might result in lots of tweets, fame and, in extreme cases, Donald Trump. To actually get results we need to look at how we can expand the solution rather than create a bigger burden on the decision makers. I will explore that in my next ­article.

This article was originally published in The National.

1 Comment

  1. […] 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 […]

Comments are closed.