What do economic policy and the fashion industry have in common? Tastes, preferences, and priorities change over time, and often repeat themselves after a while.
The history of economic diversification in the Gulf is marked by several instances of changing emphasis, even allowing for elements of continuity. Manufacturing was the name of the game in the 1970s when the sudden oil boom made large-scale capital mobilization possible.
Bahrain began work on its record-breaking Alba refinery in the late 1960s. Saudi Arabia launched the two industrial cities, Jubail and Yanbu, by the mid-1970s. Across the region, there was a renewed emphasis on downstream hydrocarbons development with obvious spill-overs into petrochemicals. These ventures proved instrumental for diversifying the exports of the Gulf countries.
By the time the “third oil boom” took off in 2003, it was services that ruled the roost, much in line with global preferences at the time. An unprecedented infrastructure surge gave an important lease of life to travel and tourism.
In the domestic context, a policy focus on entrepreneurship fed massive investments in retail trade and various other services. The region saw a proliferation of financial center initiatives, reflecting a worldwide trend.
In relative terms, manufacturing received less attention. In some cases, its progress was hampered by constraints on cheap natural gas. Some analysts highlighted rising domestic costs as an existential concern for the sector, not least because of the spectacular rise of China as a cost-competitive manufacturing powerhouse.
But even internationally, the rise of emerging markets led many to conclude that the age of manufacturing in rich countries was over, despite the fact that the world’s leading manufacturers include countries like the US, Germany, and Japan. In the UK, economists spoke of “de-industrialization.”
Looking at the recent policy initiatives in the Gulf, we appear to have reached a full circle. Manufacturing is back on the agenda as never before and explicitly recognized as a strategic development priority.
In Saudi Arabia, the National Industrial Development and Logistics Program launched in early 2019 is among the key planks of Vision 2030. Its objective is to make the Kingdom a leading manufacturing and logistics hub by developing local content and encouraging the adoption of innovative technologies such as Industry 4.0.
The broad-based program includes a geological survey of the Arabian Shield, major renewable energy projects, and the “Saudi Made” initiative among many others. Special economic zones are planned to foster the development of clusters around the country. There is a major emphasis on competitive infrastructure and regulations to support investment, an ambition that links to the strategy of the Public Investment Fund as well as the National Investment Strategy.
The UAE recently launched several initiatives prioritizing manufacturing development, above all the 10-year Operation 300bn industrial strategy unveiled in the spring of 2021. The plan seeks to increase the gross domestic product contribution of the industrial sector from 133 billion dirhams ($36.21 billion) to 300 billion by 2031, while supporting 13,500 SMEs.
A strong emphasis is placed on advanced technologies and boosting the research and development spend from 1.3 percent to 2 percent of GDP. Restrictions on foreign ownership are being relaxed. The UNIDO Competitive Industrial Performance Index recently ranked the UAE 30th globally, up five places since 2020. Bahrain recently unveiled its manufacturing strategy which, among other things, highlights new industrial zones and specialized clusters drawing on existing strengths.
This renewed focus on manufacturing makes sense for the Gulf region. It represents a logical strategic fit in view of the easy access to cheap energy, including a growing number of record-breaking renewable energy projects. The region’s wealth in hydrocarbons represents an important and versatile input for several types of manufacturing, not to mention a more resilient posture for the future than the past default practice of burning petroleum in combustion.
Important developments in the area of the circular carbon economy as well as green hydrogen mean that the regional manufacturing ambitions need not be inconsistent with the concerns of Environmental, Social and Governance investors or efforts to counter global warming. As the Saudi NIDLP explicitly recognizes, manufacturing makes sense also from the perspective of the Gulf region’s strategic location near dynamic emerging markets and the massive investments made in developing connective infrastructure. Value creation through manufacturing allows the region to make the most of its exceptional geographic advantages.
Manufacturing matters because it is a high-productivity sector. While the diversification into services was — and must remain — an important part of the broader economic paradigm shift, activities such as trade, hospitality, and basic personal services cannot compete with manufacturing in terms of productivity. Hence, their ability to create sustainable quality employment is limited, which explains their continued heavy dependency on low-cost expatriate labor.
By contrast, manufacturing jobs historically enjoy a reputation as “good” jobs. Manufacturing is a scalable activity and much of its output is exportable. As the many manufacturers around the world continue to show us, industry is a potent engine of innovation and it offers multiple opportunities for building R&D capacity. This is important from the competitiveness perspective but also for making the Gulf region a producer rather than a consumer as well as for transitioning to a knowledge-based economy.
• 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.
