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 Industrial Development in Saudi Arabia

​​Industrial Development in Saudi Arabia

 

Since the first Industrial Revolution, industry has contributed significantly to the tremendous development of the global economy as it is the center of structural transformation in economy and the main cause of development in production, employment and technology. This has contributed to an unprecedented increase in the economic growth and wealth of nations.

Industrial production currently constitutes about 71% of goods international trade volume. The volume of international industrial exports has more than tripled since the beginning of the last decade, rising from $ 4.7 trillion in 2000 to $ 11.3 trillion in 2016.

Saudi Arabia has shifted its focus to sectors other than oil because of fluctuations in oil prices that have led to disparities in revenues and, consequently, inability to achieve sustainable development. The Kingdom needs sustainable energy and exploration of new sectors for future growth by focusing on demand for industrial and defense equipment, renewable energy and mining infrastructure. In addition, the Kingdom needs to provide many job opportunities for unemployed youth and those who are about to enter the market. Therefore, development activities such as industry are a prerequisite for economic prosperity. The industry currently accounts for approximately 12% of GDP, and the Vision 2030 aims to raise its contribution to higher levels with a focus on the shift to high-tech industries towards the 4th Industrial Revolution. To accomplish this goal, existing and new projects will have to use modern machinery and technologies, which in turn will lead to the development of the industrial base in the Kingdom and help industry to play its pivotal role in economic growth and job creation​

Industry and Growth: A Global Guide

Industrialization in countries is influenced by their production factors (labor quality, natural resources, energy cost, transportation, capital available). It depends on understanding demand trends and production capacity, as well as the realistic assessment of the country's strengths and weaknesses. Income levels have continued to rise in Saudi Arabia over the past decade, but low-cost national labor is not readily available. Consequently, the industrial base within in the Kingdom needs to shift from a low-cost, expatriate labor-based model to a more capital and technology-dependent model (i.e. research and development industries) that will provide superior job opportunities for Saudi Nationals.

The continuity of industrial competitiveness relies on innovation; the key factor of productivity growth in any economy. Effective government innovation promotion policies usually focus on results and performance.

There are many ways to support innovation including financing of research and innovation in the robotics and advanced materials field where such innovations will create new markets. The government can also ensure that the results of such research and innovation are linked to companies that can transform them into products.

On the other hand, the government should work with the industrial sector and educational institutions to ensure that the skills acquired in educational institutions are commensurate with the labor market needs to help the youth take on manufacturing jobs. This includes development of specific training programs backed by commensurate certification that meet the needs of industry in the Kingdom at various levels. Supporting wages is not essential to avoid confrontation with the market forces. Instead, focus must be shifted to the development of advanced infrastructure and technology for training to sharpen the skills of young people which in turn will pave the way for them to succeed in jobs with higher income and skills. In addition, networks must be built to connect job seekers with employers.

In another context, knowing the economics of industries with high energy consumption is critical to determining the right industrial policy options. At the same time, energy-intensive industries must reduce energy consumption per unit of output and reduce the share of energy costs to total costs. Energy conservation encouragement is an effective policy at the macro-economic level, even if it challenges some producers. In California, although stringent energy consumption regulations and rising electricity prices have raised manufacturing costs, they have been a boon to the state's economy in general due to the increase in jobs and income.

Achieving industrial development requires a strong commitment by the state to accomplish its carefully crafted objectives. It is important that such objectives are adopted by the private sector to facilitate the acceptance of policies aiming to achieve them. This integration between government and private sectors will help the industry grow and increase its contribution to value added, export growth and job creation. At the same time, this very important collaboration will continue to be an important source of innovative business development that will promote significant levels of inclusive and sustainable economic growth​

Industry in The Kingdom:

The Saudi economy relies heavily on oil as it accounts for 72% of government revenues. Oil exports constitutes 75% of total exports and its contribution to GDP is up to 43%. Heavy dependence on oil, large fluctuations in its prices and the new global transformation in available energy resources have pushed the Kingdom to promote the role of other income-generating sectors, especially the industrial sector, which has great potential to dramatically improve overall economic growth.

The size of the industrial sector in the Kingdom increased from SR 32 billion in 1974 to SR 312 billion in 2017. The sector clearly has come through a structural transformation during this period as the contribution of manufacturing (non-refining) industries to industrial output increased from 32% in 1974 to 69% in 2017 with one of the highest annual growth rates among all economic activities (8.4%).

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The annual growth rate of non-oil industrial exports was 15% between 1984 and 2016, and its contribution to total exports increased from 1.4% to 21% during the same period despite the significant growth in oil exports. Today, the Kingdom ranks 37th in the industrial competitiveness index of the United Nations Industrial Development Organization (UNIDO), and 8th in the emerging industrial economies.

Despite their importance, these developments remain below the ambitions and potential for industrial sector growth in the Kingdom. This is the fundamental reason that the industrial sector has been specifically targeted in Vision 2030 with the objective of pushing it to higher levels. 

Acceleration of Industrialization

Industrialization in countries is influenced by their production factors (labor quality, natural resources, energy cost, transportation, capital available). It depends on understanding demand trends and production capacity, as well as the realistic assessment of the country's strengths and weaknesses. Income levels have continued to rise in Saudi Arabia over the past decade, but low-cost national labor is not readily available. Consequently, the industrial base within in the Kingdom needs to shift from a low-cost, expatriate labor-based model to a more capital and technology-dependent model (i.e. research and development industries) that will provide superior job opportunities for Saudi Nationals.

The continuity of industrial competitiveness relies on innovation; the key factor of productivity growth in any economy. Effective government innovation promotion policies usually focus on results and performance.

There are many ways to support innovation including financing of research and innovation in the robotics and advanced materials field where such innovations will create new markets. The government can also ensure that the results of such research and innovation are linked to companies that can transform them into products.

On the other hand, the government should work with the industrial sector and educational institutions to ensure that the skills acquired in educational institutions are commensurate with the labor market needs to help the youth take on manufacturing jobs. This includes development of specific training programs backed by commensurate certification that meet the needs of industry in the Kingdom at various levels. Supporting wages is not essential to avoid confrontation with the market forces. Instead, focus must be shifted to the development of advanced infrastructure and technology for training to sharpen the skills of young people which in turn will pave the way for them to succeed in jobs with higher income and skills. In addition, networks must be built to connect job seekers with employers.

In another context, knowing the economics of industries with high energy consumption is critical to determining the right industrial policy options. At the same time, energy-intensive industries must reduce energy consumption per unit of output and reduce the share of energy costs to total costs. Energy conservation encouragement is an effective policy at the macro-economic level, even if it challenges some producers. In California, although stringent energy consumption regulations and rising electricity prices have raised manufacturing costs, they have been a boon to the state's economy in general due to the increase in jobs and income.

Achieving industrial development requires a strong commitment by the state to accomplish its carefully crafted objectives. It is important that such objectives are adopted by the private sector to facilitate the acceptance of policies aiming to achieve them. This integration between government and private sectors will help the industry grow and increase its contribution to value added, export growth and job creation. At the same time, this very important collaboration will continue to be an important source of innovative business development that will promote significant levels of inclusive and sustainable economic growth.

 

Technology and Manufacturing

Change is the new normal, and since the global economy is constantly evolving, the Kingdom must keep abreast of new developments. The differences in the level of technology are responsible for the difference in comparative advantages among countries, and this explains the orientation of manufacturing activities in developed countries to attract skilled labor. While less technologically advanced developing countries tend to produce less skill-intensive goods and, therefore, introducing modern technology to these countries will create more jobs for the more skilled workforce.

Soon, it will be increasingly important for the Kingdom to attract highly skilled labor and to rely on automation to reduce dependency on less skilled labor. In this way, it will be able to transform its industrial base into an advanced technology-based sector managed by highly skilled and paid labor. This will attract young Saudis as has been the case in the oil and petrochemical industries where Saudization levels are very high.

Technology has made the manufacturing process more capital-dependent and less labor-intensive, especially in developed countries where the cost of labor is high. Industrial companies need fewer workers in production but more workers in research and development for production, product improvement, market research, sales and marketing... etc. In such an environment, traditional measures to maintain production functions, such as direct support, do not address the way jobs are created by the manufacturing sector. Today, the services sector creates eight out of ten new jobs, while each job in the industrial sector creates three to four jobs in other sectors. For that reason, the development of the industrial sector requires an upgrade to the supporting service sectors before, during and after the production process. This integration will provide the right platform for economic growth while creating more rewarding and sustainable jobs.

Historically, innovation in manufacturing has been the largest contributor to the productivity growth of national economies, and it is expected to continue improving productivity and growth in the coming decades. Our manufacturing sector players should begin developing automation of production processes and turning to high-tech industries to help them create higher value-added product. This is confirmed by the directions of the Vision 2030 and the industrial strategy.​