Saudi Arabia is in a period of top-down restructuring, creating risk and opportunity for its citizens and ruling family. There have been a series of recent proclamations: public policy shifts on women’s economic inclusion, limits on the power of the Islamic clerics, promises of robots and new technology, and open investment opportunities in special economic cities under separate jurisdiction. The remaking (or dismantling) of the Saudi state seems very possible. The announcement of mass arrests and freezing of financial assets of business tycoons, sitting ministers, and military brass Nov. 5 should not have been a surprise. For all of the announcements of intentions to change, though, there are some intransigent aspects of the Saudi economy that refuse to budge.

The efforts to dislodge institutional pillars of Saudi Arabia’s political and economic elite and root out corrupt practices will have regional consequences beyond plans to strong-arm the Lebanese prime minister. Less-discussed have been the effects on the business climate and reputation of neighboring financial centers like Dubai that could hinder the Gulf’s plans for economic diversification. The central banks of both the United Arab Emirates and Kuwait have placed advisories on certain local Saudi account holders, in cooperation with Saudi authorities and their anti-corruption purge. The political action of the past two weeks will have a chilling effect on domestic investment and economic activity across the Gulf Cooperation Council (GCC) states. The shared economic reform agenda is taking second place in policy priorities to regional security and regime stability.

Early indications of sell-offs in regional equity markets have been severe. The combined market capitalization of bourses in the GCC has fallen to the lowest level in a year, losing $6.8 billion of value within 72 hours of the purge. Saudi stocks, however, made some rebounds, thanks to an intervention by the Saudi Public Investment Fund, the kingdom’s sovereign wealth fund now charged with targeting both outside and domestic investment opportunities. The fallout is spreading beyond Riyadh. Dubai, as a regional financial hub of asset managers, will also suffer from capital flight from Saudi investments placed there. For large funds with exposure to newer Gulf equity markets, this could mark a retreat from regional stock exchanges to alternate emerging markets. The Dubai and Abu Dhabi markets long coveted emerging market status as a means of inclusion in large fund portfolios for locally-listed companies, only making the list in 2014; Saudi Arabia is seeking that status now. For regional capital markets and equity markets, this will be a lasting strain.

While fighting corruption is an important step in Saudi Arabia’s economic reform process, the current “purge” mechanism has favored regime stability and consolidation over institutionalization and rule of law. As with most economic reform processes, there are problems of sequencing of reforms and putting institutional supports in place to apply reforms evenly and sustainably. Corruption, connected lending, favoritism, and bias in contracting are all endemic to the Saudi business environment, but most of it links back to the driving force of investment and capital expenditure in the country, which is the state itself, not private sector actors.

Institutional Reforms to Support Growth

There are parallel and supporting processes that would assist both local and foreign investor rights and are necessary for growth. There are some economic institutional changes underway that deserve attention and some tentative commendation. Their success, however, depends on the state’s ability to create and enforce rules, widening the investment and commercial space for both citizens and foreigners.

Commercial Agency Restrictions on Foreign Ownership

These reforms need to expand immediately, especially in opening all sectors to foreign investment without commercial agency lawrestrictions that require foreign companies to partner with a Saudi citizen as co-owner or investor, rules that the Saudi Arabia General Investment Authority (SAGIA) has been easing since 2000. Recently, the Saudi government announced it would allow 100-percent foreign ownership in three more sectors—engineering, education, and health—in an effort to attract foreign direct investment and reduce government expenditure

Special Economic Zones

Free zones and new economic cities are not a new economic development mechanism (nor have they been very effective) in the kingdom, but they are a centerpiece of the Vision 2030 agenda. SAGIA (Saudi Arabian General Investment Authority), formed in 2000, and given more legal authority in 2006, is the regulator of these cities. Four are in the works: King Abdullah Economic City lies between Mecca and Medina and serves as a seaport; Knowledge Economic City, in Medina, is an information technology hub with a plan to create 20,000 jobs; Prince Abdulaziz bin Mousaed Economic City, in Hail, is slated to become a land transport hub; Jazan Economic City, south of Jeddah, will be an industrial center with plans for its own dedicated desalination and electricity plants. These are massive state investments that require outlays of capital and large contracts with master developer partners—yet there is no current public-private partnership framework for shared ownership of long-term projects like power plants or water and sewage utilities required in these special economic zones.

Tax Policy

The impact of new tax policy is not yet clear. A new value-added tax of 5 percent on most goods and services will begin in January 2018, but its collection and administration will be a new test for government. Saudis and expatriate residents are only just learning to live with taxes. Several were introduced in 2017, including new consumption or sin taxes on sugary drinks and tobacco, a new unused land tax, which has targeted wealthy (and many royal) landowners who have undeveloped properties in urban centers and new taxes on foreign laborers and their families. The implementation of these taxes will likely cause some price inflation in 2018.

Labor Policy

Labor policy is in flux. Saudi employment is a key obstacle to generating economic growth. Official government statistics put the unemployment rate for Saudi men at 12.7 percent, and 23.3 percent among young people (male and female) ages 20-29. For Saudi women, the figures are much worse at 33.1 percent unemployment. Foreigners have been barred from employment in some sectors, including dentistry and retail, and there has been substantial job loss among noncitizens; the construction industry has shrunk (on weak government spending and projects), and nearly 70,000 jobs were lost between the first and second quarters of 2017, according to research by JadwaInvestment in Riyadh. As a result, remittances from Saudi Arabia are at a four-year low, which will impact already weak economies in countries like Pakistan, Bangladesh, and Egypt. Despite the job loss among expatriates, there has not been corresponding growth in job creation for nationals. In manufacturing, for example, non-Saudi jobs declined by 6,700 in the second quarter of 2017, while just 1,000 new Saudi jobs were created.

Bankruptcy Protection

Bankruptcy law needs to be formalized. A draft law under consideration by the Shura Council since 2016 is expected to be approved by royal decree in early 2018, but there is currently little instruction or framework for orderly unwinding of failed businesses, especially between foreign and local partners.

Equity Markets

Stock markets will need to expand rights and access to foreigners; foreigners were granted the ability to purchase shares on the local exchange in 2015, but only as institutional investors on behalf of funds. In 2016, these restrictions were eased, allowing individual foreigners to buy shares in local companies on the exchange, but limited to portions of firms. A new secondary market for small- or medium-sized enterprises (SMEs), called NOMU, is set to allow full foreign ownership of firms listed on the exchange starting in 2018, but foreigners might not have many options initially. There are few firms on the main exchange, Tadawul, and expectations of new smaller firms ready to join NOMU are low, despite the government’s plan to create a dedicated $1.07-billion fund within the PIF dedicated to SMEs. An ecosystem of support—things like incubators or something akin to a small business administration—could be helpful, but is not evident yet.

Privatization and Public Private Partnerships

The early privatizations in state assets in water treatment and utilities need to demonstrate that the government can manage fair tenders. A framework for public-private partnerships needs to be formalized, and quickly, before the Saudi government gets too deep into its ambitious agenda. As many as 27 airports are meant to be sold or privatized under PPPs by the end of 2018, though not one sale has been closed yet.

Predatory State Investment

The Saudi state remains the key actor in the economy, even in these broad privatization and liberalization plans. The regulatory environment has lagged behind invitations to foreign investors, and the state has not demonstrated it is going to back off from crowding out private investment and opportunities for competitive firms in fields the state has dominated, like contracting. Where there have been opportunities for new firms to take the lead and disrupt the old economy, the PIF has promptly invested in them with large stakes, creating ownership and free market dilemmas. In new partnerships with foreign investors, including a massive $45 billion investment in the Softbank fund, aimed at technology investments globally, Saudi Arabia is using its old, circular and connected-lending strategies. In exchange for its $45 billion injection to the $100 billion Softbank fund, the fund has promised to invest $25 billion inside of Saudi Arabia.

For change to really hit Saudi Arabia’s economy, there are some substantial barriers to break through. Growth is stalled across the GCC states, while governments continue to struggle to balance their budgets. In Saudi Arabia, foreign reserve assets fell to $485 billion in September, with the pace of decline increasing over the last year, in spite of heavy borrowing on both domestic and international debt markets. Again, the timing and sequencing of the reform efforts will be essential to spur private sector growth without draining state resources too severely. The handoff between state-driven investment and private sector investment needs to be swift.

While there are many reasons to see the Saudi shake-up as a signal that old ways of politics are changing, despite Riyadh’s ambitious economic agenda, there are few reasons to see a revolution in the Saudi economy.

This article was originally published by Lawfare.