How the ‘Made in Saudi’ drive can spur industrialization

It is commonly agreed that industrialization is one of the most important engines for long-term economic growth

  
Light trails from automobile traffic traveling along the King Fahd highway, left, and Olaya Street, right, in Riyadh, Saudi Arabia. Image used for illustrative purpose.

Light trails from automobile traffic traveling along the King Fahd highway, left, and Olaya Street, right, in Riyadh, Saudi Arabia. Image used for illustrative purpose.

Getty Images/Simon Dawson/Bloomberg
 

Saudi Arabia on Sunday launched its “Made in Saudi” drive to accelerate industrial development by creating a recognizable brand and setting standards to boost that brand name. The drive is part of a new push toward greater industrialization. In 2019, Saudi Arabia established the Ministry of Industry and Mineral Resources to shepherd this effort, aided by a number of entities such as the Saudi Industrial Development Fund and the National Industrial Development Center.

The country has gone through several phases of industrialization since the 1930s, when oil was discovered. Then, new supporting industries started to meet the needs of the burgeoning oil sector, such as pipes and cables and the like. In the 1970s, with significant windfalls from rising oil prices, the petrochemical industry was set up in two giant industrial parks in Jubail (on the Arabian Gulf) and Yanbu (on the Red Sea). In 2001, the Saudi Authority for Industrial Cities and Technology Zones was set up to run the large industrial parks that were to be built in several locations throughout the Kingdom. Shortly after, the mining sector came of age and was counted as the “third pillar” of Saudi industry after oil and petrochemicals. A new railroad network was built to primarily serve the mining sector.

The public sector was the main actor in those three phases. The largest industrial entities, such as Aramco and SABIC, are majority-owned by the government. Some of the largest projects were built in partnership with transnational companies. There were many success stories along the way and the three sectors are expected to dominate the industrial scene for some time.

The new industrialization push aims to achieve the twin goals of developing new industries and encouraging the private sector to play a greater role. Currently, 80 percent of total demand in Saudi Arabia is met with imports, meaning there are many opportunities to localize some of that supply. In addition, Saudi Arabia has embarked on an ambitious export drive beyond oil and petrochemicals, creating export finance programs and other facilities to support the export sector.

It is commonly agreed that industrialization is one of the most important engines for long-term economic growth due to its capacity to absorb workforce, upgrade skills, enhance diversification and encourage structural transformation. It also spurs the growth of other sectors through linkages to ancillary industries and services.

There is no agreement on the precise elements needed for nations to enhance and sustain a process of dynamic industrialization. Academics, international development organizations and policymakers everywhere have suggested some key policies that can contribute to that process, but it is universally recognized that there is no one size fits all solution and that countries have to adjust their policy mix according to their particular needs and circumstances.

First, industrialization should be shaped by a country’s own conditions, such as its endowments of natural resources, geographical location, levels of education and skill in the workforce, wage rates, availability of capital, and the size of its population and its demographic characteristics.

Second, a limiting but important driver for successful industrialization is the level of potential public investment available for the development of both physical infrastructure in the country and human capital. Both of those elements are present in abundance in Saudi Arabia. What is needed is some fine tuning to align those investments with industrialization needs.

Third, a key factor is the availability of credit, at reasonable cost, for direct private investment in the industrial sector. This, too, is abundant in Saudi Arabia, but there is a need to streamline access to credit and reduce financing costs.

Fourth, for the private sector to engage in industrialization it needs a well-trained labor force at a competitive rate. This is a daunting challenge in Saudi Arabia because it has a segmented labor market: Nationals and expatriates. Nationals who are fresh graduates, with low skills and little experience, demand higher wages than their foreign counterparts. To be cost-effective, private companies prefer trained guest workers with low wages. There is a clear mismatch between employers’ expectations and those of Saudi jobseekers. This has resulted in a curious paradox: While there are millions of guest workers fully employed at all skill levels, unemployment rates for nationals are quite high, averaging about 11 percent during the past decade. Part of the mismatch is due to the misalignment between college education and industrialization needs. Unlike government-owned companies, private firms say they cannot afford to offer high wages to fresh graduates.

There are solutions to this structural challenge, which is not peculiar to the industrial sector. The new industries need to focus on automation, thus reducing the amount of low-skilled labor and offering high-paying jobs. This should, in turn, lead to skills-based education for nationals. Relying on expatriate labor indefinitely defeats the purposes of sustainable industrialization, which include upgrading local capabilities and skills and facilitating the structural transformation of the economy.

Fifth, industrial policy needs to be aligned with foreign trade policy, as well as overall macroeconomic policy, as these policies tend to interact and should at least not work at cross-purposes. For example, the selection of products to be freed from customs duty under a free trade deal should be consistent with industrialization needs.

Finally, promotion is essential for sustainable industrialization. Embassies abroad and government agencies need to work with private firms to promote national products. Successful promotion requires quality assurance, consistency and branding. An identity associated with high quality and moderate prices is more likely to attract consumers than one with inconsistent attributes. This is the goal of the “Made in Saudi” drive.

  • Dr. Abdel Aziz Aluwaisheg is the GCC Assistant Secretary-General for Political Affairs & Negotiation, and a columnist for Arab News. The views expressed in this piece are personal and do not necessarily represent GCC views. Twitter: @abuhamad1
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