Embracing creative destruction

The legendary Austrian-American economist Joseph Schumpeter in 1942 coined the phrase “creative destruction” to describe the forces of change by which the free market economy renews itself as new ideas continuously sweep away old ventures.

The main architect and driver of this process is the entrepreneur who is the source of “new consumers’ goods, the new methods of production or transportation, the new markets, and the new forms of industrial organization . . .”

Such ideas of innovative risk-taking and change have millennia-long traditions in the Gulf region whose limited resource base pushed local entrepreneurs to seek new opportunities elsewhere, whether in India, East Africa or beyond. All of this changed when unimaginable oil windfalls muted the old economic pressures and incentives and gave rise to rentierist business creation.

Michel Chatelus in 1987 poignantly described this new order as one where “getting access to the rent circuit is a greater preoccupation than reaching productive efficiency.” Public infrastructure investment and swelling government payrolls opened up attractive opportunities for contractors, retailers and various service-providers.

Some companies expanded into large ventures but most remained small one-man shops. Business concepts were quickly replicated but few companies achieved meaningful growth. This is by no means to suggest that innovative entrepreneurship vanished, but most businesspeople were drawn to activities with minimal setup costs and simple, static business models.

Today, the Gulf private sector is dominated by small businesses concentrated in low-productivity sectors and almost invariably focused on increasingly contested home markets. While SMEs everywhere make up more than 95 percent of all business establishments, their GDP contribution is often less than a third, partly because of their small average size: 88 percent of all SMEs in Saudi Arabia had at most five employees in 2018. Trading businesses dominated, accounting for 40 percent of all SME expenditure.

While the Gulf region has achieved impressive progress in popularizing the idea of entrepreneurship and economic participation, much more is needed to truly make the private sector the driver of growth.

A focus on real economic problems will not only translate into a real customer base but allows local value creation and production, which is good for growth. Explicitly embracing technology and digitalization will reduce the reliance on low-cost labor, create the prospect of better jobs, and build resilience and agility in an uncertain world. It’s time to embrace creative destruction.

• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.