GRM 2010 GRM 2011

Abstract Details

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Title of Paper:
GCC’s Industrial Development – Looking Beyond the Asian Model
Paper Proposal Text :
This paper 1) posits that the East Asian economic development model is not suitable to the GCC states, and 2) suggests which direction industrial diversification should take in order to create a prosperous GCC.

Would East Asian economic development (as seen in Korea and Taiwan, etc.) serve as a useful reference with regards to GCC’s future development?
East Asian economic development during 1970s and 1980s has been called the ‘Flying Geese Model’ (Kaname Akamatsu and Kiyoshi Kojima). Like the inverse V shape seen in formations of flying geese, economic development at this time was headed by Japan, followed by Korea, Taiwan, Hong Kong, and last, other Asian countries. However, there are several reasons why this model was effective during this period:
a) The U.S. (later, Japan) was a huge consumption market for Asian products.
b) The U.S. supported the growth of non-communist countries in Asia, because of the Cold War.
c) Japan was actively transferring its technology to Asian countries.
d) A plentiful supply of cheap labor supported the growth of labor-intensive industries.
In recent years, the establishment of global supply chains has caused the industrial structure in Asian countries to evolve to where horizontal division of labor is becoming the norm (i.e. intermediate materials made in countries optimal for their production are later assembled into final products in other countries).

That said, what are some features of the GCC? The total population of the six GCC states is about 50 million people—fewer than Thailand’s 60 million. Of that 50 million, about one-fifth is expatriate workers. If they tried to industrialize through labor-intensive industries, there would be not enough workers and the cost would be too high given their per capita GDP level of more than US$20,000.
Other obstacles to their industrialization are the fact that the GCC do not have enough distribution chains inside or outside of the GCC, and that they are left out of virtually all global supply chains.
In addition, consider that the largest markets for their products would be Europe followed by India. Given that China already exists as a mass supplier of cheap products, however, it is easy to imagine the kind of harsh competition they would be up against.
In light of the above analysis, it would not be appropriate for GCC to try to follow East Asia’s path to success in economic development

Then what kind of industrialization should the GCC pursue given their abundant revenue from oil? There are four policies the GCC could adopt towards industrial diversification:

A) Create and expand knowledge-intensive industries. Not just the financial service industry, but sectors such as ICT, medicine, education, and culture.
The financial service industry should include Islamic finance as well as services targeting African markets. Must differentiate itself from the Malaysian financial sector.
Create cities specialized for academic study and education, e.g. Tomsk in Russia
Brand cultural and historical assets as ‘soft power’ to attract tourists and talent.
B) Develop industries derived from oil, such as petrochemicals and its related industries.
Especially focus on the high-end market in Europe and low-end market in India—in both cases GCC has geographical advantages.
C) Develop industries which make the most of the natural environment, such as solar-powered desalination plants, horticulture, and desert tourism.
D) Improve both hard and soft infrastructure to support A) through C) above.
This is essential to increase the inflow of foreign direct investment (FDI).

Some examples of similar industrialization include:
Singapore: A trading nation with national policy clearly designed to attract FDI and to advance the industrial structure by increasing minimum wage.
Norway: Successfully parlays oil revenue into a sovereign wealth fund (SWF) to run a welfare state.
With regards to SWF investment policies, one country worth mentioning is Finland, where SITRA—under clear guidelines and the direction of parliament—is investing even in venture companies for the sake of industrial development. This has been successful in terms of industrial development as well as management of funds.

This could be the future of the GCC countries. In other words, a complex accumulation of knowledge-intensive industries/oil and nature related industries derived from the countries’ ample resources, with clear investment policies, industrial development spurred by national wealth, and the establishment of a welfare state.
This is why the GCC states must avoid internal competition and instead work together. For example, their aviation industry would do better to have a multinational airline similar to the Scandinavian Airline System, with an LCC to strategically target low-end markets, rather than the separate Qatar, Etihad, and Emirates airlines.
GCC can and will prosper by extending its membership to other Middle East and African countries in the future, as well as exploiting its common historical and cultural background, similar to how ASEAN expanded from its original members.