Capitals of Industry
By Ian Munroe • Jul 21st, 2009What financial crisis? Across the globe, 2009 is shaping up to be a dismal year for industrialists. Twenty percent of the world’s crackers (petrochemical plants that turn light hydrocarbons into chemical raw materials) have shut down because of sagging demand, according to the Middle East Economic Digest.
But none have closed in the Gulf, mainly because local petrochemicals firms have access to cheap energy, at stable prices. In countries like Saudi Arabia and the UAE, gas used to feed energy-intensive industries like petrochemicals sells via “what is effectively a government-administered price cap,” Kiwan says. Prices are fixed at a rate several times below what global supply and demand dictate, even in a slow year. “That’s why they have a huge competitive advantage,” Kiwan says, adding that despite the financial crisis, it still “seems to be business as usual” for the Gulf’s existing heavy industry.
Keen to exploit that cost advantage, Manama, Abu Dhabi, Riyadh and other regional capitals are hoping that embracing industrialization will make their economies bigger and more robust. “You’ve got to look at what are the motivations of Gulf states,” says Jane Kinninmont, an expert on Bahrain and Saudi Arabia with the Economist Intelligence Unit. “One of them is macroeconomic … when the price of oil goes down your economy suffers, so you want to protect yourself against those shocks.”
“The other impetus is more a social and political one. The oil industry’s not very labor intensive and all Gulf governments face a domestic unemployment problem, which they want to do something about,” adds Kinninmont, who authored a recent study on the Gulf Cooperation Council’s (GCC) economic outlook to 2020. “The hope is that this will be the kind of high-wage job that will absorb their graduates.”
Instead of exporting unprocessed primary resources like crude oil, as many poorer countries tend to, supplying petroleum to manufacturers is a straightforward way to boost the value of goods that Gulf firms ship to foreign markets. More jobs also mean knock-on effects, drumming up business for local real estate markets and shopping malls. In other words, it holds the promise of much better returns on investment.
Better yet, industrializing could boost economic growth by making Gulf workers more productive. According to a study released last year by the Gulf Investment Corporation and the Conference Board, a non-profit research organization, in 2007, Gulf workers produced only slightly more goods and services per hour of work than they did in 2000. Productivity in the region rose by a miniscule 1 percent annually when, by comparison, it jumped 10.5 percent a year in China over that period.
