In the era of market openness and fierce globalized competition, both multinationals and nations are once again reassessing their core competitive advantage. What is it they are good at and which makes them stand out from the crowd? For the Gulf nations, embarking on massive investment and infrastructure projects, this is an important question to ask, the alternative being lumbered with “white elephant”, uncompetitive and uneconomic projects down the road.
Different nations pride themselves on doing things in particular ways that makes them good at what they do. For example, Germans are renowned for their precision engineering, that produce world-class cars and consumer durable goods. Despite high labor cost and a seeming rigid wage market, Germany ran a record trade surplus in 2006, and was the biggest exporter of any country in the world, even ahead of the vaunted Chinese. Why? Because consumers believe in German product excellence. The same goes for another world exporter — Japan, which excels in electronics and almost daily consumer product developments, even if some are mind boggling robotic household maids... Again, Japan has run trade surpluses of nearly $100 billion in 2006, and has entered into “tough” export markets, such as China and India.
Other countries have decided to capitalize on the perception of what they do best, or are most famous for. The smaller Scandinavian countries seem to have found a niche in the fast growing mobile and telecommunication markets, while the French have put in a bit of passion for food and beverages. As for the Italians — who does not recognize the upmarket designer clothes and accessories? The Tunisians and the Turks have access to cheap leather products and their work force is just as good as the Italians, and so where did they go wrong”? They “went wrong” in not having a complete product supply chain-from market research, design, public relations, to procurement, manufacturing and marketing. Where are the renowned Tunisian or Turkish design houses? To someone from planet Mars, the handbags and leather jackets from all these three countries might look, feel and smell the same, but for the so-called sophisticated consumer, the key is the brand name.
Some countries have decided to opt for services, whether it is in tourism, banking, legal, insurance or media. This might be lucrative in the short run, until some other country decides to compete in these sectors, but it leaves the economy lopsided and prone to rapid changes in technology and an “education gap”. The buzz word is to create knowledge-based economies, which would be more creative and at the knife-edge of research and development in services as well as in new industries such as biotechnology, robotics, environmental protection and pharmaceuticals. Britain seems to have fallen into this category of “new economy”, driven by its financial services and allied support industry, as well as world class pharmaceutical and chemical research. Other countries such as Singapore, decided to opt for both a knowledge-based service economy as well as advanced industrial production. To be in this type of economy, one requires a tradition of excellence in science and quality education. There are those in Britain that argue that being in this type of service and “creativity” economy is somewhat dangerous, as there is a limit to ingenious financial asset-stripping and private equity fund deals.
In the Gulf, some countries have decided to be everything, while others have decided to specialize in what they can do best. Dubai constantly reinvests itself as the hub of the knowledge-based economy of the Arab world, and a “creative” economy is a matter of faith. Bahrain has decided to opt for the financial services and ancillary support economy, while Kuwait has opted to maximize its investments overseas, given the limited market and non-hydrocarbon resource base of that country. Qatar has opted to become the world’s premier gas production and distribution center and build up allied industries, while at the same time developing knowledge-based education system that can service the whole Gulf. As for Oman, it has opted for balanced socio-economic growth, where social equality and a pace of development that is commensurate with the country’s human and natural resources are finely balanced. Which other country in the Gulf would have bounced back in a socially cohesive manner following the disastrous Tropical cyclone Gonu, as Oman did. It might not be too long before Oman becomes a calm retreat for highly stressed out Gulf families, opting out of the ever increasing push for more economic growth.
For Saudi Arabia, the choices are more open. The domestic market is the largest in the Gulf, and there are a diversified number of local industries that cater to this market, while at the same time upgrading their operations to meet international competition. The key comparative advantage lies in the Saudi petrochemical industry. The upstream oil and gas sector will remain the country’s main source of revenue, based on low cost energy and feedstock. The major economic cities in planning or under construction, as well as the overwhelming number of mega projects are either petrochemical, or are energy related. These are estimated to be around $300 billion for oil and petrochemicals over the next 20 years, with an additional $80 billion — $100 billion for the mega cities. Specialization in the petrochemical sector can provide the building block for other industries, and expand the value-chain with diversification in domestic industries in specialty chemicals and to building up a support base for consumer-related by products.
Some countries will always be ahead of the Kingdom in the “creative service” economy, but concentration on optimizing on Saudi Arabia’s petrochemicals industries will ensure that there is always potential for export of these products to an increasing consumer base around the world. That is why the multinationals have decided to establish joint venture in the Kingdom and not elsewhere. They have done their sums and it made sense. Domestic investors are advised to do the same.
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)