Innovations in products and services (human resources) have been the main driving forces in global economic development in the recent past, rather than physical resources.
As Saudi Arabia enters the World Trade Organisation (WTO), greater emphasis must now be placed on redefined roles of the public and private sectors to meet the future challenges.
Public sector-led development strategies planning for economic results must be replaced with enabling and facilitating economic dynamism. This process is under way in Saudi Arabia, but at a slower pace compared to competing economies.
Public Sector Performance
Just how does the international community rate Saudi Arabia in its socio-economic development process?
In the United Nations Industrial Development Organisation (Unido) Industrial Report 2005 its measure of socio-economic capabilities for Middle East North Africa (Mena) and Turkey (15 countries), Saudi Arabia ranks first for financial system, fourth in knowledge, fourth in governance, 10th in openness and 15th or last in political structure. In short, these composites reflect ready facilitation of trade and commerce but tardiness in new concept flow and reorganisation for innovation and change to significantly improve its international industrial competitiveness.
Facilitating socio-economic change is not constrained by budgetary matters in Saudi Arabia with the public sector currently running a significant surplus. The problem is in management and allocation of developmental funds.
Table 1 indicates significant allocation of funds (SR25 billion or $6.66 billion) to facilitating organisations that should make it internationally competitive in this regard. However, one must notice that on average 65.5 per cent goes to Saudia as subsidies, with its privatisation under way for more than six years but never accomplished. Such tardiness in no way meets international standards of performance.
On the other hand the government is providing increasing resources for technical education both in real and percentage terms as indicated in Table 1. Increases during the base period of 44 per cent grow to 52 per cent during projections. Even more significant however is that the percentage of facilitating organisations’ total allocations vastly increases from 8.36 per cent in 1998 to 20.26 per cent in 2007 indicating that the public sector is giving strong support for enhanced human resources necessary for industrial development in the kingdom. The question remains whether these funds go mostly to brick and mortar versus quality instruction related to industry requirements.
It is to be noted that the base period data is old relative to needs considering innovation currently drives development processes. Projections barely cover the near-term. Thus, analysts attempting to assist toward international competitiveness can hardly measure recent changes. This deficiency reflects minuscule allocation of developmental resources for timely gathering of socio-economic data neglected by both the public and private sectors in the kingdom.
Private Sector Performance
The private sector’s performance in industrial development can be assessed examining select sectors exports and imports. Table 2 indicates continuing petroleum and mineral products sector dominance at 90 per cent of these total exports reflecting a physical resource-based economy versus a human resource economy currently driving international economic development. However, the resource-based petroleum and mineral products sector provide significant comparative advantage that cannot be ignored in the economic development process of the country. The challenging question is how best to increase other sectors currently representing 10 per cent of exports?
Examining imports by select sectors in Table 3 reveal machinery & electrical equipment provide 40 per cent of the total, although its rate of increase declines from 8 per cent in the base period to only 5 per cent in projections, indicating some domestic replace-ment capabilities. Only chemical products approach a balance between imports and exports, with the remaining sectors far below. Perhaps this indicates that chemical products are more internationally competitive, whereas other sectors have much further to go. Paucity of data on sub-sectors and internal operations/productivity of industrial firms critically limits ability to assess trends toward adopting innovation and human resource development in the private sector.
Therefore, we turn to international measures of industrial production level by country where average annual growth of Manufacturing Value Added (MVA) for Saudi Arabia indicates 4.8 per cent growth between 1990-2002 raising its ranking from 53 to 50 among countries. During this period MVA increased from $681 to $846. Meanwhile, although exports of manufacturers increased in value from $676 to $723, the kingdom’s ranking fell from 39 to 46, strongly indicating losing competitive strength relative to international competitors.
Measuring Industrial-cum-Technological Advance (ITA index) Saudi Arabia ranks 66 among countries whereas for Industrial Advance it ranks only 96 versus 38 for Technological Potential. These international assessments of the kingdom’s industrial productivity reveal a wide gap between potential and actual progress.
Change for Progress – Public Sector
A Supreme Guiding Committee has been formed to prepare a National Industrial Strategy until 2020 with the challenge to diversify industrial production into non-hydrocarbon products. Its aim is to improve the contribution of the private sector through industrial competitiveness and diversification within the framework of market liberalisation since joining the WTO. With technical assistance by Unido and consultations between public and private sectors, the move sounds credible. However, does this enable and facilitate economic dynamism while bureaucratic processes still use out-of-date data to facilitate development?
Only when significant increases are observed in science and engineering education, training and conformity assessment can Saudi Arabia’s industrial competitiveness grow to international levels. A complementary strategy is to utilise excess capital tapping into the global pool of knowledge purchasing interests in, or forming joint ventures with, international companies with proven technologies and R&D facilities. Building domestic knowledge systems for innovative development go hand in hand with this strategy.
Further, partnerships for industrial development require greater freedom to form technical societies for IT, engineering, management, entrepreneurs, researchers, etc establishing their own quality and developmental policies, goals and objectives in order to enhance human resource contribution for innovative processes in the country.
Implementing entrepreneurial development policies, including incubator projects with venture capital support, can best assist innovation growth in Saudi Arabia.
The Prince Abdullah bin Abdulaziz Science Park (PASP) established in 2003 near King Fahd University of Petroleum & Minerals (KFUPM) is closely integrated with the university. The location with its proximity to science and engineering colleges provides for considerable interaction between tenant firms, their personnel and university scientists and engineers. The park will house a range of firms, mainly those involved in the petroleum and chemical industry and the growing IT sector. Schlumberger, Ciba and Japan Co-operation Centre, Petroleum (JCCP) are initial tenants.
The Jeddah Bio City Company is assisting establishment of the first Bio Park in the Middle East where a highly dedicated and focused biotechnology research park will be developed with the aid of professional experts provided by the company. The park is located near King Abdul-Aziz University in Jeddah.
Most recently, the Saudi Arabia General Investment Authority (Sagia) and Intel Capital have decided to establish a $100 million venture capital investment company to invest in technology companies in the kingdom. The fund will invest in those developing innovative value-added services and software while employing new business models and encouraging entrepreneurship in the ICT industry.
Sagia and Swiscorp have announced a consortium to invest $5 billion in petrochemical and energy-intensive projects in the kingdom. By including nine local partners in the consortium the multiplier effect of involvement in internationally-competitive projects will certainly enhance economic development in the other sectors the partners are involved with.
Change for progress - private sector
Transnational corporations (TNCs) are a major force driving economic and industrial development globally with many opportunities for Saudi industries to join these global value chains. Coupling global integration with domestic development can be accomplished when and if domestic small and medium enterprises (SMEs) seek contract manufacturing, as suppliers of components, parts and services, as well as distribution for global just-in-time systems rather than merely serving as agents and distributors.
Global industrial trends, not to be ignored since joining WTO, indicate linkages between investing TNCs and SMEs, together providing international value chains, thus creating greater development potential than current development efforts under way. There is joint inherent interest in enhancing the sourcing of production inputs from the local economy as part of the vertical value chain where domestic industry can cater to demanding quality, managerial and technical requirements of the TNCs.
However, such oppor-tunities are fleeting since TNCs are narrowing the large number of SMEs actively competing as participants in the integrated global just-in-time delivery systems. Nevertheless, those able to compete enable opportunities for market creation and technological upgrading through assistance of the TNCs that are significant. Trends indicate TNCs are increasingly specialising in select core capabilities while outsourcing more non-core products and services thereby ensuring faster growth opportunities for those SMEs able to provide competitive goods and services.
An example of TNC involvement in SMEs internationally for mutual benefit includes: Shell International Livewire Programme which develops entrepreneurs aged 18-30 in start-ups by competition for training and support in IT, finance and marketing providing mentoring during their new enterprise development.
This is not merely self-interest on the part of Shell. It provides suppliers in the countries in which it operates reduced cost, increased market access, greater security over raw materials, improved quality of supply, branding benefits and a more vibrant and diverse local economy.
The lesson to be learned is for the large Saudi corporations to assume greater social responsibility implementing such a programme in their own country.
Summary
Now that Saudi Arabia has joined the WTO, vastly reducing uncertainty regarding its future role in economic development, domestic and international investors can now accelerate their decision making regarding new project and enterprise development. However, this assumes that the public sector can accelerate change by shifting its role from planning for economic results to enabling and facilitating economic dynamism. Viewing these change processes under way it is interesting to note that joining the WTO reduces uncertainty in the private sector but increases uncertainty in the public sector. Radical shifts are required in the public sector’s new facilitating role. It is very secure and safe to plan and control, but quite a different scenario where technical societies for IT, engineering, management, entrepreneurs, researchers, etc establish their own quality and developmental polices, goals and objectives. Real progress depends on an early and effective change process!
Many changes by the public sector were required and accomplished in order to join the WTO. Now however, accelerated change will be required to maintain competitiveness where innovation and shortened product lifecycles dominate growth prospects.
* Dr Cox is a well-known economist and CEO/Director of Petrochemical Projects Development Company (PPDC)
